Zero-Based Budgeting - ZBB

AAA

DEFINITION of 'Zero-Based Budgeting - ZBB'

A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.

INVESTOPEDIA EXPLAINS 'Zero-Based Budgeting - ZBB'

Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by managers or group leadership.

Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or production; their contributions are more easily justified than in departments such as client service and research and development.

VIDEO

Loading the player...
RELATED TERMS
  1. Budget Deficit

    A status of financial health in which expenditures exceed revenue. ...
  2. Budget Manual

    A set of instructions used within large organizations to prepare ...
  3. Financial Accounting

    The process of recording, summarizing and reporting the myriad ...
  4. Cash Budget

    An estimation of the cash inflows and outflows for a business ...
  5. Expense

    1. The economic costs that a business incurs through its operations ...
  6. Activity-Based Budgeting - ABB

    A method of budgeting in which the activities that incur costs ...
RELATED FAQS
  1. What are some tactics businesses can use to increase unlevered free cash flow?

    Unlevered free cash flow is defined as earnings before interest taxes, depreciation and amortization (EBITDA) less capital ... Read Full Answer >>
  2. Why does zero-based budgeting require ongoing evaluation and management?

    Zero-based budgeting must have ongoing evaluation and management due to the fact a zero-based budget requires management ... Read Full Answer >>
  3. How can a growing business avoid stagnation when using zero-based budgeting?

    Zero-based budgeting is commonly used by companies to review expenses in their annual budgets and create cost management ... Read Full Answer >>
  4. How does zero-based budgeting help lower operating costs?

    Zero-based budgeting helps lower costs by reducing unproductive spending. Zero-based budgeting is a rigorous process that ... Read Full Answer >>
  5. What are the revenue recognition criteria in accrual accounting?

    The major advantages of zero-based budgeting are flexible budgets, focused operations, lower costs and more disciplined execution, ... Read Full Answer >>
  6. How is marginal analysis used in making an investment decision?

    Zero-based budgeting is a simple, effective concept: keep track of every dollar and put all of your money to use. The goal ... Read Full Answer >>
Related Articles
  1. Budgeting

    What is Zero-Based Budgeting?

    Zero-based budgeting starts from a "zero base" and then every function within an organization is analyzed for its needs and costs.
  2. Budgeting

    6 Months To A Better Budget

    Can you have perfect abs in just six minutes a day? Maybe not, but you can have a rock-solid budget in six months.
  3. Budgeting

    The Beauty Of Budgeting

    Make it to the end of the month, before you run out of money.
  4. Entrepreneurship

    Run Your Finances Like A Business

    Think of yourself as your own little company. To make it run smoothly, you need to take a look at your books.
  5. Personal Finance

    Affordable Ways For Upgrading Your Home

    Upgrading your home doesn’t have to be an expensive chore. Here we give you 8 affordable ways to increase its appeal.
  6. Retirement

    Millennials: Retire With $1,000,000 --Here's How

    It is possible for Millennials to retire with $1,000,000, if they take the right steps and make the necessary sacrifices now.
  7. Budgeting

    The Adverse Effects of Cheap Gas

    While low gas prices are welcomed, smart budgeters must anticipate future price hikes and consider the impact of low gas prices on investments and taxes.
  8. Budgeting

    Top 6 Best Value Hotels

    Here are the top value hotels across America, most of which can be had for less than $100 per night and less than $50 per night if booked in advance.
  9. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.
  10. Home & Auto

    Will Downsizing Your Home Pay Off?

    A little math can help you determine whether downsizing your home is worth it. It involves subtracting the costs of such a transition from expected gains.

You May Also Like

Hot Definitions
  1. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  2. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  3. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
  4. Treasury Yield

    The return on investment, expressed as a percentage, on the debt obligations of the U.S. government. Treasuries are considered ...
  5. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  6. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!