What is Zero-based budgeting (ZBB) | McKinsey & Company

The video explains Zero-Based Budgeting (ZBB) as a financial strategy that starts budgeting from zero, rather than adjusting previous budgets. Instead of assuming existing spending is necessary, ZBB requires organizations to justify every expense based on current needs and strategic priorities. This granular approach uncovers hidden costs and inefficiencies that companies may not be aware of.

Key points about ZBB include:

• It is more than a budgeting tool; it is a cultural shift promoting financial discipline across the entire organization, not just the CFO.
• Encourages a collective mindset where all employees think about resource allocation in terms of what is best for the company rather than individual departments.
• Originated in 1970, ZBB breaks down budgets into small spending categories and evaluates trade-offs to decide where to allocate funds.
• Recently, ZBB has evolved beyond budgeting into a comprehensive cost and performance management approach.
• It helps companies reduce costs in the short term and reallocate resources to strategic priorities for sustained impact.

No step-by-step methodology was explicitly outlined, but the approach involves:

• Starting budgets from zero each period.
• Breaking down expenses into granular categories.
• Evaluating the benefits and trade-offs of each spending decision.
• Promoting organization-wide financial discipline and alignment with company goals.

Presenter/Source

• McKinsey & Company