Zero Based Budgeting Keeps Coming Back. Here Is Why It Keeps Leaving.
Zero based budgeting has cycled through corporate finance since the 1970s, adopted with real enthusiasm and then quietly abandoned a few years later, only for the next wave of companies to rediscover it. Here is why both halves of that cycle keep happening.
A Budgeting Idea That Refuses to Die
Every decade or so, a wave of companies rediscovers zero based budgeting, embraces it with real enthusiasm, and then a few years later quietly lets it fade, only for another wave of companies to rediscover it again. Zero based budgeting, commonly abbreviated ZBB, has cycled through corporate finance since the 1970s, championed most recently by private equity owned consumer goods companies in the 2010s looking to squeeze out cost savings, and it keeps coming back for a genuinely good reason, and keeps leaving for an equally real one. Understanding both halves of that story explains more about how budgeting actually works inside companies than either a pure endorsement or a pure dismissal of the idea would.
How Traditional Budgeting Actually Works
Most companies budget incrementally, meaning next year's budget for a given department starts with this year's approved budget as the baseline, and the conversation is mostly about the increment, how much more or less should this line item get compared to last year. A marketing department that had a 10 million dollar budget this year might propose 11 million dollars for next year to fund a new campaign, and the negotiation happens almost entirely around that additional million dollars, while the original 10 million dollars largely gets carried forward without serious re examination. This is efficient, budgeting an entire company from a blank sheet of paper every year would be enormously time consuming, but it has a real weakness, spending that made sense five years ago, for a program, a vendor contract, a headcount need that no longer exists, can keep getting carried forward year after year simply because nobody is forced to defend it again from zero.
What Zero Based Budgeting Demands Instead
Zero based budgeting flips the default. Instead of starting from last year's approved number, every expense, in theory, starts at zero and has to be justified fresh each budget cycle, as if the department were being funded for the first time, regardless of what was approved the year before. In practice, most companies do not literally rebuild every single line item from nothing every year, that would be prohibitively time consuming, but they apply true zero based scrutiny to a rotating portion of the budget each cycle, often the discretionary spending categories most likely to contain stale, no longer justified costs, forcing managers to build a fresh, bottom up case for every dollar in that category rather than simply defending an increment above last year's number.
Incremental budgeting asks how much more do you need. Zero based budgeting asks why does this spending need to exist at all. The second question is far more uncomfortable to answer, which is exactly why it finds real savings that incremental budgeting quietly lets slide year after year.
Why Companies Adopt It
Companies turn to zero based budgeting, often in a specific moment, a new CFO arriving, a private equity acquisition, a period of margin pressure, precisely because incremental budgeting has let genuine waste accumulate for years without anyone being forced to re justify it. The savings zero based budgeting exposes are frequently real, a vendor contract nobody had renegotiated in six years, a legacy software license for a system the company migrated off of two years ago but never cancelled, a team structure built for a business unit that has since shrunk. Consumer goods companies that adopted zero based budgeting in the 2010s reported meaningful cost reductions in the years immediately following adoption, and those results are exactly what draws the next wave of companies to try it.
Why Companies Abandon It
The reasons companies eventually pull back from zero based budgeting are just as real as the reasons they adopt it. True zero based analysis is genuinely exhausting, for finance teams building the process and for operating managers forced to rebuild and defend a detailed justification for spending they may have already justified thoroughly the year before, and that fatigue accumulates. Applied too aggressively or too bluntly, zero based budgeting can also cut spending that was actually working, since a rigorous cost cutting exercise sometimes rewards whichever manager makes the most persuasive case in a budget meeting rather than whichever spending genuinely creates the most value, and can quietly damage investments, in customer relationships, in employee development, in brand building, whose payoff is real but not easily quantified in a single budget cycle review. Companies that push zero based budgeting too hard for too many consecutive cycles often see morale and long term investment suffer in ways that do not show up in the budget itself until later.
Incremental vs Zero Based
| Feature | Incremental budgeting | Zero based budgeting |
|---|---|---|
| Starting point | last year's approved budget | zero, rebuilt from justification |
| Effort required | low | high |
| Best at | routine, stable operations | finding stale, unjustified spend |
| Risk | waste accumulates unchecked | fatigue, cutting things that were working |
The Bottom Line
Zero based budgeting keeps coming back because incremental budgeting genuinely lets stale spending accumulate, and it keeps leaving because rebuilding every budget from scratch, cycle after cycle, is exhausting and can cut into investments that were actually working. The companies that get the most out of it treat it as a periodic reset, not a permanent operating model.