Zero-based budgeting (ZBB)

Zero-based budgeting starts every planning cycle at zero rather than at last year's spend. Each cost, department, or initiative has to be justified on its own merits for the coming period, instead of being assumed to continue and adjusted by a percentage for growth or inflation.

This is the opposite of incremental budgeting, the more common default, where prior-year actuals plus an increase or decrease form the starting point and only the change needs explaining. ZBB instead asks "why does this cost exist at all," which surfaces spending that has drifted away from current priorities but survived by inertia. It is often paired with cost allocation work to make shared and overhead costs visible enough to challenge.

ZBB matters most in mature organizations where legacy spending has accumulated over many budget cycles, and it is commonly used as a one-time or periodic reset rather than a permanent annual process, because the exercise is labor-intensive. The main pitfalls are underestimating the time and cross-functional negotiation it requires, applying it so rigidly that it disrupts multi-year commitments, and using it as a blunt cost-cutting exercise rather than a genuine reallocation toward higher-value spend, which erodes support for it in later cycles.