Zero-based budgeting is a budgeting method under which all expenses must be explained starting from zero for a new period against using the previous budget as a base and adjusting it for the new period.Zero-based budgeting (ZBB) helps companies align their expenses with larger strategic goals. This process involves building an annual budget from zero to verify whether each component is cost-effective, useful, and can result in better savings. This tool is commonly used by companies to easily identify and eliminate unwanted expenses, gain better control of spending, and focus on high-profit areas.
A simple zero-based budgeting example would be: Suppose a SaaS company purchased unique technology products from another company for $30,000.It wants to adopt zero-based budgeting for next year. While listing down its expenses, the company realizes that it can make the technology products at a lesser cost than what it paid to the other company. If it builds them internally, it can save $22,000.In its zero-based budget, it will therefore set aside $30,000 – $22,000 = $8,000 as its expense budget for the technology products.