Zero-Based Budgeting: Building for Success Again, and Again, and Again

by J. Stephen McNally, CPA, CMA | Dec 20, 2019

Pennsylvania CPA JournalThere are three ways for a company to increase economic value: increase revenue, cut costs, or do a combination of the two. But a number of “growth-starved” companies have moved toward zero-based budgeting (ZBB) in an effort to stay profitable.1

ZBB is a budgeting technique whereby each manager starts with a baseline budget of zero, then has to build his or her requests from the ground up. The manager must then justify every aspect of the budget to senior management. In theory, ZBB enables an organization to more precisely define and effectively fund critical business initiatives, scrutinize spending, redesign cost structures, and ultimately boost competitiveness.
ZBB is not a new concept, but 3G Capital Partners, a Brazilian private equity firm, reignited interest in the method by using it to slash overhead costs from various acquisitions. Notably, 3G leveraged ZBB after acquiring H. J. Heinz (which they subsequently merged with Kraft Foods) and Burger King.

Does ZBB offer a path to true competitive advantage, or is it the current flavor of the month?

The Budget

Organizational success starts with an ambitious vision, a clear mission, and defined strategies. All of these must then be translated into measurable objectives.2 Ultimately, management must develop and execute carefully articulated plans to achieve its strategic objectives, and the budgeting process plays a critical role.

A budget expresses, in quantitative terms, management’s plan for achieving the organization’s strategies and objectives. Corporations have goals regarding market share, growth, profitability, dividends, and other metrics. Nonprofit entities also have clearly defined goals, whether it’s to increase the number of free meals served, patients cured, new homes built, scholarships granted, or otherwise. Achieving goals requires a thoughtful plan. The purpose of the budget is to lay out, in detail, how management expects to allocate and expend its human, financial, and other resources, and define the results management expects to achieve by doing so.
A budget is like a Swiss Army knife: a variety of tools in one. It is a tool for planning, control, communications, and motivation:3
  • Planning tool – A budget is a written plan for the future. During the budgeting process, management can evaluate and pressure-test key assumptions underpinning its strategic goals and objectives. Management can also assess various scenarios and, through these iterations, identify potential obstacles, risks, and opportunities. In short, budgeting enables better decision-making.
  • Control tool – A budget enables better control of costs by establishing guidelines within which various departments, functions, and divisions must operate and by serving as authorization to spend. As the plan is executed, management can analyze actual vs. planned spending and leverage this analysis to ensure company resources are being used efficiently. Managers with fiscal responsibility are more likely to carefully manage their resources if they know variances to the budget are being monitored. Finally, the board and senior leaders can more effectively hold their managers accountable if actual results are compared to the budget, which is then used to make performance and compensation decisions.
  • Communications tool – The budget, when used effectively, helps employees understand their organization’s overall goals and commitments. It gives clear signals regarding what the organization hopes to accomplish and how it plans to do so. The budgeting process also drives alignment across departments, functions, and business units, ensuring subunit objectives are consistent with other subunits and the organization overall. As a communications tool, the budget facilitates planning, coordination, and control.
  • Motivation tool – A thoughtfully developed budget can motivate employees to work hard and do the right thing. Those engaged in developing the budget are more likely to self-monitor spending and stay within approved amounts. To be motivational, the budget must be both challenging and realistic. And it must allow for some flexibility to address changing circumstances vs. original assumptions.

Zero-Based Budgeting 101

The term “zero-based budgeting” derives its name from the assumption that, theoretically, managers will start each budgeting cycle with a baseline budget of zero (basically a blank sheet of paper). Each manager then carefully considers the activities required to achieve his or her objectives, then builds a detailed budget request accordingly. That is, you start at a budget of zero and add each expenditure you expect to incur during the period to deliver against your objectives. The ZBB approach forces managers to examine and scrutinize all expenses for each new period. Such an approach typically requires managers to justify every expense item in their budget request to senior management.

ZBB differs from the more traditional budgeting approach, often referred to as incremental budgeting. At its most basic, a traditional budget is determined via a “last year plus X percent” methodology. The manager starts with the prior period budget or actual results and then adjusts for anticipated changes. Assuming a consistent level and mix of business, creating the traditional budget could be as simple as increasing prior-year cost estimates for price inflation on raw materials, labor, benefits, utilities, and other expenses. If management anticipates a change to the level or mix of the business, or intends to invest in new product development, a new marketing campaign, technology, or other initiatives, management would adjust the prior-year budget accordingly. 

The intent of ZBB is to ensure that funding decisions continually refocus on key business initiatives. The goal is to ensure resources are allocated based on the merits of the request relative to the organization’s goals and objectives. Likewise, managers should find it easier to identify and scale back or terminate activities not related to these priorities.

When leveraging ZBB, managers assess what activities should be performed or services provided, and at what level, frequency, and cost. For example, the budget owner for a customer service call center, currently answering 99.9 percent of calls within 15 seconds, should consider the cost benefit of loosening this level of service (only answering 97 percent or 95 percent of calls within 15 seconds, or 99.9 percent of calls within 30-plus seconds). Similarly, the corporate controller could assess the cost impact of requiring quarterly vs. monthly reconciliations, or requiring all journals to exceed a defined dollar amount.

With ZBB, managers should always exhibit a continuous improvement mind-set, looking for opportunities to be better, faster, and cheaper. Are there, for example, opportunities to streamline, standardize, automate, outsource, or offshore work? By doing so, you may be able to optimize the team’s value proposition in meeting stakeholders’ needs. Ideally, ZBB becomes the catalyst to broader cost transformation throughout the organization.

Potential Advantages

There are a number of potential advantages that can be derived from using a ZBB approach. Here are some of the most common:
More clarity of corporate mission – ZBB provides a tool for analyzing, reviewing, and allotting resources to areas and initiatives that support the organization’s most important priorities. Each manager, in developing his or her budget request, must link a proposed spend to specific activities or services. By doing so, managers are forced to clarify their department’s goals and objectives. Each manager is also required to justify requests, including budgetary choices and assumptions, with senior management. Through this interaction, senior management can ensure each department, function, and business unit is aligned with the overall corporate mission. The recurring process allows for feedback and required adjustments if there are gaps.

Better communication – The ZBB process can be a catalyst for fierce discussion and debate regarding the organization’s strategic goals and objectives, throughout and across the organization, including how to most effectively achieve them.

Enhanced resource allocation – Leveraging ZBB should result in a better alignment of the organization’s resources with its strategic goals. If management keeps in mind the overall corporate mission and objectives throughout the process, funds will more likely be allocated where they are needed most.

Continuous improvement – In a ZBB environment, managers are expected to identify alternatives when it comes to the activities performed by their teams. They should determine if a given activity remains a priority or if it should be scaled back or eliminated. The manager should consider alternatives for each activity deemed relevant, including the “who” and “how” as well as the service level and frequency. Managers should ask themselves if there are opportunities to automate, streamline, or standardize work, or if outsourcing or offshoring certain activities would be beneficial. Managers should also consider the cost/benefit of offering various levels of customer service, or if the frequency of conducting certain controls should be reconsidered. By assessing various alternatives, management may discover more efficient or effective ways to run the business.

Less artificial budget inflation – When using a traditional budgeting process, managers often determine a budget by simply taking prior-year costs plus X percent for inflation. ZBB, in contrast, requires managers to link their budget request to specific activities. As a result, artificial budget inflation should be easy to spot. This technique imposes a restraining influence on the manager’s budget development.

Scrapping non-key activities and redundancies
– By forcing managers to prioritize the activities most critical to achieving organizational objectives, ZBB enables the identification of non-key activities that may have become tangential. Managers can then consider such activities for elimination or outsourcing. During ZBB reviews, senior management may also discover that multiple departments are conducting the same activities, enabling such redundancy to be eliminated. ZBB can help identify and eliminate wasteful spending.

Potential Disadvantages

Along with the potential advantages, the ZBB approach can present a number of challenges.

Managerial time commitment – To justify all costs each budget cycle without relying on past expenditures, management must review operations at a very granular level (such as flight, lodging, meals, and other travel expenses based on specifically identified trips). A significant investment of time is required to develop and review ZBB budgets in detail as mandated by the process. The repetitive nature of ZBB compounds the time commitment. A hybrid approach could lessen this pain point: consider using the ZBB process every two or three years instead of annually, or only when a new strategic plan is developed.

Training requirements – Significant training is required to effectively roll out a ZBB program, including training for the budget owners, the budget preparers, and senior managers accountable for reviews. This training represents an additional commitment of time required by management and other personnel.

Bureaucracy – Continually building budgets from a baseline of zero requires significant analysis, reports, and meetings; therefore, additional staff are needed to manage the process. This bureaucracy represents new costs to the organization.

Gamesmanship – The intent of ZBB is to ensure funding decisions prioritize key business initiatives. To protect budget requests, some managers may attempt to skew spending to those activities known to be among senior management’s priorities.

Justifying intangibles – With ZBB, managers are expected to link all expenditures to specific activities and services, and then justify why such spending adds value. It can be challenging to justify the appropriate level of spending for areas of the business not producing tangible results, such as investments in basic research and development.

Practicality – It may not be practical, or even feasible, to justify each and every expense. For example, does the benefit of analyzing the use of, and specific requirement for, paper clips, rubber bands, and other inexpensive items outweigh the cost of conducting this review? One way to counter getting stuck in this quagmire is to focus the ZBB process on only those costs that are material and can be influenced.  

Budget agility – When followed from start to finish, the ZBB process requires significant time and effort. Continuously updating a ZBB budget to reflect revised assumptions or changing circumstances can be slow and cumbersome. Due to this lack of agility, management may not make ongoing budget refinements, even when doing so helps ensure the budget remains relevant to the evolving competitive situation.

Employee morale – As noted above, the use of ZBB by 3G Capital Partners to slash overhead costs from H. J. Heinz, Burger King, and other acquisitions has reignited interest in the ZBB technique. But following stories about 3G’s success, there are reports on how acquired companies have endured drastic head-count reductions, severe budget cuts, micromanaging, and other painful changes. Many perceive ZBB in a negative light. Employee morale may suffer. 

The ZBB Sweet Spots

By effectively leveraging ZBB, management may identify ways to streamline, standardize, automate, outsource, or offshore work. Indeed, ZBB can be the catalyst to broader cost transformation, enabling management to radically redesign its cost structure and boost competitiveness.

Some situations lend themselves well to the ZBB approach, starting with mergers and acquisitions. The technique forces individual managers to identify critical activities and link their budget requests to them. It enables senior management to ensure budget alignment with the overall corporate mission and to identify potential redundancy. ZBB can be an integral part of the integration process.
A second sweet spot relates to organizational complexity. In a ZBB environment, managers are expected to continually challenge the status quo, looking for opportunities to automate, streamline, or standardize the work. By doing so, they can reduce organizational complexity and related cost.

Confronting conventional thinking is a third sweet spot, especially in companies experiencing significant competitive profit or cost pressure. ZBB encourages management to question and assess established assumptions. By challenging every assumption and reviewing every line item, including those related to the entity’s sacred cows, management is more likely to fund strategic imperatives and to eliminate non-value-add activities and costs.


Benoit Fouilland, CFO of online advertising firm Criteo, notes that he is “a true believer in zero-based budgeting.”4 Per PepsiCo’s CEO Indra Nooyi, however, “When you embark on a zero-based budgeting program that [cuts] to the bone and jeopardizes your ability to grow the top line, I think that’s a formula for disaster.”5

Indeed, although 3G has reignited interest in ZBB, its ultimate success in using the tool remains to be determined. “While [3G] has made headway cutting costs, the bigger challenge for companies like Heinz and Kraft will be reigniting growth.”6 So which is it? Is ZBB a competitive advantage, or is it a flavor of the month?

Yes, if you implement a ZBB program with appropriate lead time, training, support, resources, and manager engagement, and if you apply ZBB intelligently, the method can offer a competitive advantage. It can help you to prioritize strategic imperatives, curb expense inflation, eliminate unnecessary spending, and create value.

But a word of caution: if you use ZBB indiscriminately, too frequently, too strictly, or without manager-level commitment, you will create great organizational pain without realizing any value from the process.

As a call to action, I challenge you to learn more about the pros and cons of ZBB, then assess in what way this tool could help your organization become more competitive. 
1 David M. Katz, “Starting from Scratch,” CFO, p. 35 (November 2015).
2 J. Stephen McNally and Vincent Tophoff, “Stacked in Your Favor,”
Strategic Finance, p. 32 (April 2015).
3 Inspired by Certified Management Accountant (CMA) body of knowledge.
4 David M. Katz, “Starting from Scratch,”
CFO, p. 36 (November 2015).
5 Ibid, p. 35.
6 David Kesmodel and Annie Gasparo, “Kraft-Heinz Deal Shows Brazilian Buyout Firm’s Cost-Cutting Recipe,”
The Wall Street Journal (March 25, 2016).

J. Stephen McNally, CPA, CMA, is finance director/controller of Campbell Soup Company’s Napoleon & Flavor Operations. He is a member of the Pennsylvania CPA Journal Editorial Board, serves on the Institute of Management Accountant’s global board of directors, and the board of directors for the Ohio Chamber of Commerce. He can be reached at
Read It Your Way

digital edition

Read the latest edition of the Pennsylvania CPA Journal via the web, digital edition, or mobile app. 

Read Now
Member Benefit

The Pennsylvania CPA Journal is a PICPA member benefit.f Receive quarterly editions of the Journal delivered to your doorstep.


Premier Sponsors

Platinum Sponsors

Gallagher Bollinger Logo

Silver Sponsors

Paychex logo
Capstan Logo
epsa USA

Bronze Sponsors

Fox School of Business, Temple University

Interested in becoming a sponsor? View packages >