What Is Zero-Based Budgeting?

This article was updated to reflect new information on November 23, 2022.

Many businesses are shifting into recovery mode after the economic disruption caused by COVID-19. While it’s too soon to divine the lasting implications of this pandemic, most organizational leaders anticipate there will be echoes well into the foreseeable future.

Against this backdrop, some companies may find that old-school budgeting approaches no longer work as well as they once did. Under normal circumstances, budgeting from a prior period is reasonable. But if this period will barely resemble the last, that may be a less-helpful option. 

This is why some businesses are literally starting from zero. This practice, known as zero-based budgeting, may be useful for companies looking to align spending with business goals. 

What Is Zero-Based Budgeting?

Zero-based budgeting (also called zero-based planning) is a method of preparing budgets without carrying over numbers from previous years. Because it requires budget owners to start from scratch, they must review and justify every line item. Zero-based budgeting is not only a cost-reduction strategy but a shift in mindset, forcing leaders to question entrenched habits and historical assumptions. Questioning old processes may be especially important now as we navigate the many unknowns resulting from this global pandemic.

Introduced in 1970 by Peter Pyhrr, zero-based budgeting remained largely unused and often criticized. But over the last few years, it’s found some fans as finance teams have begun to embrace it. The pandemic has only added to this rise in popularity as it can help manage impacts from COVID-19.

Bottom-Up Budgeting vs. Zero-Based Budgeting

Those new to zero-based budgeting might understandably confuse it with bottom-up budgeting, but they’re not the same.

Bottom-up budgeting, even though it begins at the department level, still uses a traditional approach in that line items are informed by historical spending trends and assumptions. But zero-based budgeting doesn’t rely on a previous year’s actuals, and the new line item could truly exceed the previous year’s if that expense is justified.

Financial leaders historically have had a love-hate relationship with zero-based budgeting, giving rise to a handful of common myths, including that it will lead to cutting expenses to the bone or that it doesn’t work for growth-oriented companies.

The Pros and Cons of Zero-Based Budgeting

But there are plenty of pros. For instance, zero-based budgeting allows companies to start fresh by abandoning a reliance on last year’s expenses and instead build the budget from the bottom up. This surgical approach to cutting costs is more strategic, requiring thought and intention around any amount of money spent.

Zero-based budgeting also unearths otherwise unquestioned spending. Buried expenses that roll over uncontested from year to year, yet may no longer serve the company’s best interest, are brought to light and scrutinized. Another benefit is enhanced accountability. Each budget owner must examine and defend their future spending, in the process creating a fully invested and informed decision-maker.

Critics of zero-based budgeting claim it’s too complex and time-consuming to rebuild the budget from the ground up, opting instead for the traditional budgeting approach that relies on historical trends and economic forecasts. Because of time demands, opponents argue that zero-based budgeting lengthens the already too-long annual planning cycle, making it an unreasonable option for many with more traditional planning approaches. Finally, critics claim that zero-based budgeting limits a company’s focus too narrowly on expenses and doesn’t allow it to plan for innovation and growth.

Up until a few years ago, these disadvantages were probably valid. Spreadsheet-based planning was difficult to begin with, and obliterating budgets and plans every year made an already arduous task even harder.

But modern, cloud-based planning solutions have changed the game substantially, and today’s finance teams are using them to work with real-time data, collaborate across departments and business units, and course-correct quickly.

Zero-Based Planning: Best Practices

Organizations looking to explore this rapidly growing approach should take these best practices into consideration:

• Understand that there is no one-size-fits-all. Some finance leaders may feel the need to get granular, diving into detailed line items, while others would do well to roll up expenses into categories.

• Make it companywide. For the full spectrum of benefits, zero-based budgeting must be integrated into a companywide planning process. This will help better identify drivers and key correlations, so you can make more strategic and data-driven decisions.

• Be strategic. To avoid a short-sighted focus, stress test your zero-based budget plan by running multiple what-if scenarios to make sure it’s strategic, has longevity, and can meet your long-term goals.

• Use driver-based modeling. Reduce the time required for zero-based budgeting by creating driver-based models that simplify the budgeting process, reduce manual work, and provide consistency across departments.

• Develop a culture of collaboration. Implement the kind of planning culture that encourages managers to partner with finance to discuss or challenge assumptions, model the impact of cost-cutting measures, and explore additional opportunities for operational efficiencies.

• Keep it continuous. Integrate continuous checks into your daily routine to monitor expenses against business goals and changing business environments, and be prepared to make adjustments quickly.

Just Say No to Spreadsheets

And if you are adopting zero-based planning for your organization, think twice before relying on spreadsheets to do the heavy lifting. Spreadsheets are simple and powerful, and talented users can make a lot happen quickly. But spreadsheets are also cumbersome, retrospective, and inaccessible to less tech-savvy business users, making collaboration at scale tough. Version control alone is challenging and takes far too long, let alone conducting sophisticated analyses.

As a workaround to these constraints, traditional spreadsheet-based planning systems have always limited how customers plan.

First were the legacy on-premise tools designed to support a small senior finance audience to model the business at a macro level—completely contrary to the concept of interconnected companywide planning that involves every function and planner. Then the cloud vendors attempted to address these issues—also through limitations in complexity and scope. Common limits included:

• The number of dimensions in a model.
• The number of users.
• The number of models and the number of versions.
• The way users interact with the data and the reports.

Some vendors even resorted back to the concept of creating separate reporting cubes to provide faster reports, which meant customers weren’t seeing real-time results. This trade-off between speed and power is inadequate in today’s fast-paced and complex world. As we’ve explored, modern planning is valuable precisely because it’s both fast and powerful—enabling smarter, faster decisions.

Clearly, a new generation of planning technology is needed.

Enter Workday Adaptive Planning

That’s where Workday Adaptive Planning enters the picture. A solution like Workday Adaptive Planning streamlines and even automates much of the manual work and data entry that might otherwise make traditional zero-based budgeting a burden. Workday Adaptive Planning enables businesswide planning, from balance sheet and cash flow to zero-based budgeting and expense, personnel, and revenue forecasting. It also means modeling without limits, planning continuously and comprehensively to gain a holistic view of the business, and having the ease of use necessary to bring every stakeholder into the planning environment with little to no training.

When you use a purpose-built, modern, cloud-first planning platform, planning shifts from being periodic and siloed to ongoing, concurrent, and unified. Every team across the organization works with the same current and accurate performance data, making smart decisions within both the granular and bigger-picture contexts.

Plans update in real time based on changes to other related plans, effortlessly forming a seamless, interconnected system. Decision-makers—both operational and strategic—are constantly exposed to more recent, relevant, and contextual data to support more effective decisions.

Modern cloud-first planning platforms give every planner across the business the data and functionality to elevate planning from a functional necessity to an explorative exercise that adds value. The right platform balances powerful modeling capabilities with self-service accessibility, so you don’t need technical coders to facilitate. Dispersed planners can prepare with greater sophistication, continually testing their assumptions and modeling performance based on any combination of business drivers—anticipating change and better identifying next actions—with total visibility of the business.

Planning outcomes have always been shaped by the tools used to achieve them. For a long time, technology constraints imposed a hard ceiling on the vision, sophistication, quality, foresight, and depth of planning intentions. Today, for modern planners leveraging the power of the cloud, the inverse is true: technology is freeing.