Zero-based budgeting

Use this structured process to create a culture of cost management within your business.

In recent years zero-based budgeting appeared to experience a renaissance, as cash-strapped businesses had to justify every penny of their spending.

While the UK economy continues to be volatile, it’s vital that smaller businesses cut unnecessary expenditure while trying to grow at pace.

Sustained use of zero-based budgets could help to enforce a culture of cost management.

Isn’t it time you examined whether it can benefit your business?

Zero-based budgeting means budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending.

By starting from a ‘zero base’ at the beginning of each budget, you can create a really effective process for analysing and deciding where to allocate your funds.

It is essentially a way of improving return on investment (ROI) across your business.

Peter A. Pyhrr developed the idea of zero-based budgeting in 1969 while he was an account manager at Texas Instruments in the US. In 1977, he wrote his seminal book on the subject, ‘Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses’.

Jimmy Carter, then Governor of Georgia, was the first to adopt the process of zero-based budgeting within government when preparing the fiscal 1973 budget.

Here are some common advantages of zero-based budgeting.

  • Helps a business assess whether each of its departments is appropriately funded
  • Allows management to focus on current numbers rather than the figures within previous budgets
  • Can remove needless spending
  • Can enable better communication within departments by involving employees in decision-making and budget priorities

Unfortunately, zero-based budgeting doesn’t guarantee you’ll make savings, as the trick is in how you execute it.

Moreover, the process can be complex and there may be opposition from managers who fear their budgets are under threat and who don’t relish having to justify their spending.

That’s why clear communication, and making sure you involve staff at all levels of the business, can help the process to work more effectively.

Commercial spend in consumer products: ready for zero-based budgeting? Link opens in a new window

A detailed report from worldwide professional services experts Deloitte on zero-based budgeting, including what it means, how it typically works, and some of the challenges of using it.

Five myths (and realities) about zero-based budgeting Link opens in a new window

An interesting and in-depth article on zero-based budgeting from business consultants McKinsey & Company.

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Reference to any organisation, business and event on this page does not constitute an endorsement or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circumstances and, where appropriate, seek professional or specialist advice or support.

Making business finance work for you

Making business finance work for you

Starting a business doesn’t come with a set of instructions.

We know that understanding the many different types of financial product in the marketplace can be difficult.

Our Making business finance work for you guide is designed to help you make an informed choice about accessing the right type of finance for you and your business.