Knowledge · Strategy & Planning

Budgeting · Zero-Based Budgeting (ZBB)

Zero-Based Budgeting

📂Strategy & Planning⏱2-min read📊Practical🔗10 related

What is budget planning?

In one line
A budgeting method (Zero-Based Budgeting) that doesn’t start from last year’s budget but requires every item to be justified again from zero, stripping out spending that has continued out of habit.
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⚡ Summary in 3 lines
  • Re-justify from zero, not from last year’s budget
  • Rank packages by priority and cut from the bottom
  • Applying it to part of the budget, on a rotating cycle, is more realistic than full adoption

What zero-based budgeting really changes is not the amount but who carries the burden of proof (accountability). Under incremental budgeting, whoever proposes a cut has to bring the evidence, and because that is a hassle, line items simply survive. Under zero-based budgeting it is the reverse: whoever wants to keep an item must bring this year’s evidence. “We spent it last year” no longer counts as evidence, and that one change shifts the tone of the budget meeting.

Decision packages usually split one activity into three levels: a minimum level, below which the activity no longer works; a current level, meaning how it runs today; and an expanded level, if more money is added. Rank at the level of these tiers, not the activity. The ranking only works if Training A’s minimum level can outrank Training B’s current level. You also need to decide what to apply it to. Rigid spending you can’t change, such as labor costs, depreciation, and rent already under contract, leads to the same conclusion even when re-examined from a blank page. The real payoff comes from discretionary spending such as SG&A, marketing, training, and outsourced services, which typically makes up 15–30% of total costs.

The most common misconception is treating zero-based budgeting as a cost-cutting campaign. If you set a cut rate up front (“let’s start by trimming 20%”), business units submit packages padded just enough to survive, and items that were actually delivering results disappear, starting with the quietest teams. Ranking by department is another frequent mistake. If you rank only within each department, the split between departments stays exactly as it was last year, and you end up back at incremental budgeting. The ranking must be a single company-wide list. Workload is a real constraint too. If teams have to write 200 packages every year, by year two they copy last year’s documents and just change the dates, so it is more sustainable to limit the first year to the top 30 discretionary spending items.

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💡 In plain English
It’s like cleaning out a closet: you pull everything out and have to give a reason to wear each piece this year, and only then does the pile shrink.
Why it matters in practice
Keep spending the way you always have, and spending that delivers no results never goes away. A budget is not a question of money but of priorities.
Origin and sources

It was introduced in the 1970s by Peter Pyhrr at Texas Instruments and became widely known when Jimmy Carter applied it to the state budget as governor of Georgia.

Source · Peter Pyhrr, “Zero-Base Budgeting” (1973)
An example

Consider a hypothetical case: Company A, an auto parts maker with 740 employees and annual revenue of KRW 230 billion (≈ US$172,078,400). Its training budget had stayed at roughly KRW 900 million (≈ US$673,400) a year for three years. In 2023, orders dropped 12%, and the CFO sent down a single line: “Cut training costs by 30%.” The talent development team had no basis for deciding what to cut first.

  1. Instead of an across-the-board cut, the head of talent development counter-proposed zero-based budgeting. They split KRW 910 million (≈ US$680,800) into 41 courses and built three package levels for each course (minimum, current, expanded), producing 97 packages in total.
  2. For each package, they had to write one sentence: “What gets blocked this year if we don’t run this training?” The onboarding manager wrote, “Field deployment slips by three weeks.” A general-interest lecture that had run for 15 years never managed to fill in that line.
  3. Six division heads and the CFO built a single company-wide ranking of all 97 packages in a half-day workshop. Once the minimum level of quality job training ranked above the current level of the executive leadership program, someone said, “This ranking makes sense.”
  4. They drew the line at the available budget of KRW 650 million (≈ US$486,300). Statutory mandatory training and safety training for the new line were carved out as exceptions regardless of rank, and the 14 courses that were cut kept a path to reapply in the second half, which reduced pushback.
  5. As a result, the training budget fell 29%, from KRW 910 million (≈ US$680,800) to KRW 650 (≈ US$1) million, yet job training hours per employee rose from 11 to 14. About 60% of the cut came from in-person general-interest courses where attendance had stayed in the 40% range.
Related terms
Business Plan · Annual Management PlanA document that lays out, with evidence and numbers, what you will sell, how you will make money, and when and how much you will spend to do it. It serves as the basis for execution and approval.Cost Structure · Cost ReductionThe makeup of which costs go into producing revenue and in what proportions, and the work of changing that structure to improve profitability.Payoff Matrix · Priority MatrixA screening tool that places ideas or tasks on two axes, expected impact and implementation difficulty (effort), to decide what to do first.Decision Matrix · Weighted ScoringA table with options in rows and evaluation criteria in columns. You assign a weight to each criterion and sum the scores to support an evidence-based choice.Fixed Cost · Variable Cost · Contribution MarginA concept that separates costs that vary with sales (variable) from those that do not (fixed), then uses revenue minus variable costs to judge fixed-cost recovery and earning power.Labor Cost Budget · Total Labor CostA budgeting method that sets next year’s cap on the total of salary, bonuses, severance pay, the employer’s share of social insurance, and benefits, then manages headcount and raise rates within it.Rolling Forecast · Revised BudgetA continuous outlook that looks 12 to 18 months ahead every month or quarter instead of ending at fiscal year-end. It addresses the limits of an annual budget fixed once a year.Marketing Budget AllocationThe decision of how to divide a set marketing budget across channels, activities, and timing based on goals and channel efficiency. It is about where each dollar goes, not how much is spent.AI Training Budget · AI Training Cost per EmployeePlanning next year’s AI training spend by estimating headcount, course level, and tool costs together. The per-person amount is simply a unit for explaining that result.Training Year-End Close · Training Budget Execution ReportA year-end procedure that tallies how much of the annual training budget was spent, and where, against plan. You report it to management with reasons for unspent or carried-over funds, then pass the results on as the basis for next year’s budget request.
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Last updated 13 Sep 2026 · Reviewed by John Kim

FAQ

Not recommended. The workload is heavy. A realistic approach is to apply it partially to items where inertia builds up easily, or to apply it company-wide every two to three years.
It is more efficient to treat statutory mandatory training and fixed contractual costs as exceptions and focus on discretionary spending.
First agree that the goal is reallocation, not cutting. Showing examples where cut budgets moved to other priority initiatives makes people more receptive.