Most budgets start with last year's actuals and a standard markup. You tweak a few assumptions, adjust for inflation, and finalize the plan. But this incremental approach keeps waste hidden and separates your financial plan from the company's real strategy.
Zero-based budgeting flips the script. You build your budget from a clean slate. Every dollar needs a clear purpose before it makes the cut. It takes more coordination upfront, but it ensures you validate every expense against your current goals:
- Does this cost help us hit our revenue targets?
- Are we prioritizing high-impact initiatives right now?
- Could we reallocate these resources to generate a higher ROI?
Whether you manage a lean operation or plan for aggressive expansion, zero-based budgeting gives model owners and finance teams total control over resource allocation. It clears away historical bloat so you can focus capital on initiatives that drive value.
What is zero based budgeting?
Zero based budgeting means you explain and support every expense from scratch every budget cycle. You don’t start with a copy of last year’s numbers. Instead, you build each department’s budget from the ground up.
Peter Pyhrr developed the concept at Texas Instruments in the 1970s. The goal is: each line item needs proof that it deserves funding based on what you need now and your real priorities, not history.
Incremental budgeting assumes last year was right and then tweaks a bit. Zero based budgeting doesn’t assume anything. Each cost earns its place.
You don’t ignore history. Past spending helps you decide, but you don’t let it decide for you. Every expense stands on its own. Does it fit your strategy? Does it deliver value you can measure?
Zero based budgeting breaks your business into decision units. You list everything each one does, then rank them by priority. Start with your most valuable activities and fund those first. Add the rest only if you have resources left.
Why ZBB matters and common use cases
Zero-based budgeting helps you rethink your spending from the ground up. You identify waste, cut redundancies, and redirect capital toward high-impact work.
The value extends well beyond a lighter budget. Companies often see 10-20% cost cuts in the first cycle, but the strategic clarity is the real win. You gain:
- Clearer resource allocation
- Stronger accountability for every department
- Spending tied directly to your strategy
Scrappy finance teams use this method to make every dollar work for growth. You focus exclusively on initiatives that move the needle.
It also helps you tighten costs to run more efficiently or prepare for market shifts. This discipline is vital when you enter new markets or prepare for investor reviews. Stakeholders appreciate the data-backed rigor.
Use ZBB to manage expenses across cross-functional teams, link hiring decisions to real outcomes, and create better scenario plans. This strengthens your variance analysis. You compare actuals against a purposeful plan instead of old habits.
This approach builds organizational agility. You know exactly which costs are essential and which are optional. If plans change, you reallocate resources immediately. You skip draw-out debates and move straight to action.
Investors trust teams that demonstrate spending discipline. A justified cost structure builds confidence in your financial leadership.
Methodologies and approaches
You can adapt zero based budgeting to match your goals and resources. Here are the most common ways finance teams use it.
Standard ZBB approach
The classic version requires justifying every single expense. You don’t reference past budgets. Each new cycle is a blank slate.
This approach is detailed but takes time. You list every activity, estimate each cost, and show how it ties to current priorities.
It’s best for focused areas, like overhead. It cuts deep, but it takes planning and effort.
Priority-based method
This method ranks all activities by value. You fund the highest priorities first and work down the list until your resources run out.
This ties spending straight to strategy. You spot low-value expenses that crept in over time. Funding goes where impact is highest.
You use this when weighing trade-offs between projects or initiatives. It makes funding choices clear and transparent.
Activity-based method
This approach links costs to what actually drives results in the business. You look at each activity’s ROI and its impact.
For example, with support, measure the cost per ticket, how fast you resolve issues, and customer satisfaction. This data shows where spending delivers real returns.
It works best for operational functions with measurable metrics. It’s harder for creative or strategy-led work where results are less direct.
Decision-package approach
Here, you bundle related expenses into "decision packages." Each has details about activities, costs, and expected benefits. You rank these packages by value and alignment with strategy.
Instead of thousands of lines, you assess a handful of packages. Each one shows why it deserves funding, plus what happens if you don’t fund it.
Packages often include different funding options, minimum, current, or enhanced levels, so leadership has choices.
Rolling ZBB method
Rolling zero based budgeting happens quarterly or continuously, not just yearly. You might do a full review for every department in turn. Or, focus each quarter on a specific set of expenses.
This spreads the work and builds cost discipline into your regular planning. You keep priorities fresh and budgets lean all year.
It helps you pivot fast. When priorities shift, your plan adapts without major disruption.
Key components and considerations
To nail zero based budgeting, watch how you group and analyze expenses. Start by separating essential from discretionary spending.
- Essential: Keeps the business running (core payroll, infrastructure, legal compliance).
- Discretionary: Helps you grow or get efficient, but isn’t required for day-to-day operations.
Define decision units or cost centers clearly. This could be a department, program, or business function. Tight definitions prevent overlap and confusion.
Handle fixed and variable costs differently. Fixed costs (like rent and insurance) usually don’t have much wiggle room. Variable costs (tied to activity levels) are where you can optimize.
Separate operational expenses from strategic investments. Operations need steady funding. Investments, like product development or expansion, need focused evaluation based on long-term value.
Headcount costs matter. Include salary, benefits, taxes, and total employment costs. Treat contractors and consultants as separate. They’re flexible, but often cost more per hour. You can see 10-30% savings on overhead staff by realigning permanent staff to new operating models.
Distinguish between committed and truly discretionary spend. Some costs look flexible but are contract-bound. Others seem fixed but can be renegotiated.
If you have shared services or matrix teams, clarify how you allocate costs. When teams share resources, everyone needs to agree on how to justify budgets. Sort these details early to keep zero based budgeting on track.
Benchmarks and rules of thumb
Benchmarks for zero based budgeting differ by company and industry stage, but here are some practical guideposts.
- High-growth teams often apply ZBB to 20-40% of discretionary expenses, not the entire budget.
- Mature companies often achieve 10-25% cost reduction in first cycles. Highest savings usually come from SG&A and overhead.
- Temporary labor can yield over 20% in savings. Complex areas like logistics often deliver more than 10%.
- The first cycle takes 2-4x longer to plan. Allow 3-6 months for first rollout.
- ZBB often delivers biggest wins for SG&A and overhead. Direct production costs don’t have as much room to trim.
- Most companies switch between full ZBB every 2-3 years and incremental budgeting in between.
- The best teams grab 70-80% of identified savings. Not every opportunity is practical once reality hits.
- Plan for 12-18 months to build ZBB capability and embed it in your workflow.
Common pitfalls to avoid
The biggest mistake: thinking zero based budgeting is a quick, one-time fix. The real value comes from making it routine. A single round rarely sticks.
Don’t confuse across-the-board cuts with real zero based budgeting. True ZBB means building the budget from scratch and proving every dollar’s worth.
Some teams underestimate the commitment. ZBB takes analytical focus, strong data, and active management. Skimp on resources and you’ll get shallow analysis.
Treating every expense equally wastes time. Go deep where the dollars matter most. Look for meaningful realignment, not endless analysis of small costs.
Stay focused on long-term value. It can be tempting to cut R&D or employee development for quick savings, but that damages competitiveness. Don’t turn ZBB into just a cost-control exercise. Keep your eye on big-picture results.
Keep in mind, revenue generating expenses can look discretionary but actually drive growth. Evaluate spend based on ROI and business impact, not tradition.
Adjust for seasonality and cycles when setting baselines. Don’t use a low quarter as your "forever" standard.
Departments differ. Engineering and customer support have separate cost structures and value. Comparing them directly leads to poor targets. Instead, set realistic expectations by function.
Support change. ZBB needs leadership buy-in and clear goals. Public agreement without real support stalls progress. Position ZBB as a resource tool, not budget policing.
Good data is key. Without granular cost and activity metrics, ZBB becomes guesswork. Build out your data systems before you begin.
Remember, efficiency isn’t always about cutting. Sometimes ZBB reveals where you should invest more. The goal is smart resource allocation, not minimum spend.
One-time costs, restructures, or acquisitions can distort your analysis. Adjust for these when comparing and planning.
How to implement zero based budgeting in Runway
Runway’s modeling platform makes zero based budgeting straightforward. Here’s the quick setup:
- Create a new scenario in Runway specifically for ZBB. Scenarios let you test assumptions without changing your live forecast.
- Define your decision units as separate cost centers. Use Runway’s dimensions to tag expenses by department, function, and activity. You can analyze spending at any level.
- In your new scenario, build expenses from zero. Don’t carry last year’s numbers. Use Plans to explain justification, expected results, and how each line ties to strategy.
- Use custom fields and tags to mark expenses as essential, discretionary, revenue-generating, or strategic.
- For headcount, use Runway’s planning tools to compare staffing scenarios. See the full cost for each role, weigh full-time versus contractors, and test reallocation.
- Group related plans into decision packages. For example, bundle all customer support costs under one tag for easier review.
- Build Pages to present ZBB analysis to leadership. Compare current spending, zero based budget, variance, and strategy side by side.
- Evaluate different funding levels for each decision package. Give leadership clear choices for minimum, current, or extra funding.
- Track progress through the year. Use variance analysis to monitor gap between actual and zero based plan, and adjust as needed.
- For rolling ZBB, create a quarterly review cycle. Set up plans that trigger reviews for specific areas each quarter.
- Use Runway’s audit tools for transparency. You’ll have a clear record of every number and change, who, what, and why.
- Adapt model structure as you go. Add new details, change categories, or reorganize decision units as you learn what works best.
- Runway’s collaborative features let department leads submit zero based proposals right in the tool. No manual version control or endless emails. Everyone contributes. It’s essential for cross-team planning inside any company.
Building long-term financial discipline
Zero based budgeting isn’t just about trimming costs. It helps you build a culture of discipline and smart spending, where every dollar matches your goals.
You’ll ask tough questions, cut waste, and invest in true growth. The reward is better resource allocation, clarity, and fast reaction to change.
Success needs commitment, smart data, and active leadership. The typical return is 10-20% cost savings and closer strategic alignment which justifies the work.
Runway makes it easy. You get modeling flexibility, tools for collaboration, sharp analytics, and clear storytelling. You can build ZBB plans, test scenarios, track outcomes, and show the story to stakeholders, all in one place.
Want to see how much further your spending can go? Schedule a demo and see Runway in action.