This is called incremental budgeting. And for a long time, in stable economies with predictable 2% inflation, it worked “good enough.” It was easy, it required minimal friction, and it kept the wheels turning.
But we are no longer living in stable times. We are operating in an economic landscape defined by volatility and, most critically, high inflation.
In this new reality, relying on last year’s numbers as a baseline for next year’s spending isn’t just lazy budgeting; it’s financial negligence. The assumptions that held true twelve months ago are now obsolete. Supply chains are snarled, energy costs are erratic, and labor costs are surging.
When the very foundation of your costs is shifting like quicksand, simply adding 10% to last year’s budget doesn’t account for reality. It just compounds past inefficiencies while failing to address present dangers.
This realization is triggering a massive shift in the corporate finance world. CFOs and business leaders are realizing that to survive—and even thrive—during this inflationary period, they need a radical departure from the status quo. They are ditching the comfort of incrementalism and embracing the rigors of a returning champion: Zero-Based Budgeting (ZBB).
ZBB is not a new concept, but its relevance has never been greater. It’s a methodology that demands you start from scratch—zero—every single cycle. Every dollar spent must be justified on its own merits today, not simply because it was spent yesterday.
In this extensive deep dive, we will explore why the old guard of incremental budgeting is failing under inflationary pressure, what Zero-Based Budgeting truly entails (and why it has a bad reputation), and how companies are successfully implementing ZBB to regain control, discover hidden value, and navigate the stormy seas of high inflation.
Understanding the Old Guard: The Comfort Trap of Incremental Budgeting
Before we understand why ZBB is the necessary solution, we must first deeply understand the problem it solves. Why has incremental budgeting been the dominant standard for so long, and what are its inherent flaws?
The “Last Year Plus X%” Mentality
Incremental budgeting is beguilingly simple. The premise is that the current budget is a stable foundation. The company is operating, lights are on, and products are shipping. Therefore, the budget for the upcoming year should be the current year’s actual spend, adjusted for known factors.
Typically, these factors are:
- Inflationary adjustments: Adding a small percentage across the board to account for standard cost-of-living increases.
- Growth projections: Adding resources to support revenue targets (e.g., “We need two more salespeople to hit the 15% growth target”).
- Known cuts: Removing one-time expenses from the previous year.
It sounds reasonable. It’s efficient in terms of time spent budgeting. It doesn’t rock the boat. Department heads know the drill: if you got $1 million last year, ask for $1.1 million this year, expect to get cut back to $1.05 million, and everyone goes home happy.
Why It Worked in Stable Times
We cannot fault companies for relying on this method for decades. In an environment where inflation hovers around 2% annually, year-over-year variances are minimal. The “historical base” of spend is a reliable predictor of the future.
If your office rent increased by 3% a year for ten years straight, incremental budgeting handles that perfectly. If raw material costs were hedged and stable, there was no need to reinvent the wheel every twelve months.
Furthermore, incremental budgeting is politically easy. It avoids difficult conversations. By accepting the previous year’s base as “approved,” management doesn’t have to challenge the existence of entire departments or legacy projects every year. It maintains organizational peace.
The Hidden Dangers of Incrementalism (Even Without Inflation)
However, even in the best of times, incremental budgeting is deeply flawed. It is an approach that inherently fosters mediocrity and inefficiency.
The “Use It or Lose It” Phenomenon
Perhaps the most damaging psychological effect of incremental budgeting is the end-of-year spending spree. Because budgets are based on the previous year’s actual spend, managers are terrified of coming in under budget.
If a manager saves $50,000 through efficiency in Q3, they know that if they return that money to the company treasury, their baseline budget for next year will be cut by $50,000. Their reward for efficiency is a smaller empire next year.
So, what happens in November and December? They buy new office furniture they don’t need. They pre-pay vendors. They attend expensive conferences. They ensure every dime is spent to protect their baseline. Incremental budgeting actively punishes frugality.
Cementing Inefficiencies
Incrementalism assumes that the baseline spend is necessary and efficient. It almost never is.
Imagine a company subscription to a legacy software platform that costs $100,000 a year. Five years ago, it was vital. Today, only three people log into it because the company migrated to a newer cloud solution. Under incremental budgeting, that $100,000 is part of the “base.” It gets approved automatically, perhaps even with a 3% price hike added. No one questions its existence because they are only looking at the increment, not the base.
Over time, these layers of sediment build up—outdated processes, redundant roles, unused tools—all cemented into the budget because no one ever asks, “Do we still need this?”
The Inflation Catalyst: Why “Business as Usual” is Now Broken
If incremental budgeting was inefficient in stable times, it is downright dangerous in times of high inflation. The economic environment we face today has shattered the assumptions that make incrementalism feasible.
When Historical Data Becomes Irrelevant
The core premise of incremental budgeting is that the past predicts the future. High inflation destroys that premise.
When inflation goes from 2% to 8% or 10%, the historical baseline becomes meaningless. Last year’s $1 million budget might only buy $900,000 worth of goods and services today.
If you simply apply a standard “plus 5%” increase to a department’s budget when the actual costs of their inputs—energy, logistics, specialized labor—have risen by 15%, you are effectively handing them a massive budget cut. You are setting them up to fail.
Conversely, some costs might not rise at all. Applying a blanket inflationary increase across all departments overfunds some areas while starving others. The lack of granularity in incremental budgeting makes it impossible to manage real-time inflationary pressures precisely.
The Spiral of Rising Input Costs
Consider a manufacturing firm. In a stable year, they might budget for a 3% increase in raw steel costs.
In a high-inflation environment driven by supply shocks and geopolitical instability, steel prices might jump 40% in a quarter, then drop 10%, then rise another 20%. Energy costs to run the factory might double. Shipping containers might go from $3,000 to $15,000 and back down to $8,000.
How does an incremental budget handle this? It can’t. The variances are too extreme. A budget set in November is laughable by March. Companies relying on incrementalism find themselves constantly re-forecasting, chasing their tails as actuals blow past budgets month after month.
The Danger of Autopilot in Volatile Times
Think of budgeting like driving a car. Incremental budgeting is like using cruise control on a long, straight, empty highway. It works fine.
High inflation is like suddenly driving off-road into a mountainous terrain during a blizzard. If you leave the cruise control set to 65 mph (the “last year plus X%” approach), you will crash. You need to take manual control of the wheel, the gas, and the brakes. You need to constantly assess the terrain ahead.
High inflation demands agility. It demands the ability to rapidly reallocate capital from low-priority areas to cover surging costs in critical areas. Incremental budgets are rigid cages; they do not allow for this necessary agility.
The Challenger Returns: What is Zero-Based Budgeting (ZBB)?
Enter Zero-Based Budgeting. ZBB is the methodology best suited for volatile, inflationary environments because it removes the reliance on historical assumptions.
Starting from Scratch: The Core Philosophy
The definition of Zero-Based Budgeting is simple, though its execution is complex: At the start of every budget cycle, every department starts with $0.
There is no baseline. There is no entitlement to last year’s funds. Every single expense, from a paperclip to a multi-million dollar marketing campaign, must be justified anew based on its expected return and its alignment with current strategic priorities.
If the Marketing department wants $5 million this year, they cannot say, “Well, we had $4.8 million last year.” They must build a case from the ground up: “We need $X for digital ads which will generate Y leads; we need $Z for this trade show which yields these key accounts.”
ZBB shifts the burden of proof. In incremental budgeting, finance has to prove why a manager shouldn’t get the money. In ZBB, the manager has to prove why they should get it.
It’s Not Just About Cutting: ZBB as a Growth Engine
ZBB has a PR problem. In the 80s and 90s, private equity firms often used “Zero-Based Budgeting” as a euphemism for brutal, slash-and-burn cost-cutting before flipping a company. It earned a reputation for being Draconian, morale-killing, and shortsighted.
Modern ZBB is different. While it is an incredibly effective tool for cost containment, its true power lies in strategic reallocation.
In a high-inflation environment, you will inevitably face rising costs that you cannot avoid (e.g., electricity for the factory). To pay for those, you must find savings elsewhere. ZBB allows you to identify the “fat”—the legacy software, the unproductive initiatives—and surgically remove them.
Crucially, those savings aren’t just pocketed. They are redirected. ZBB allows a company to say: “This old product line is no longer profitable due to inflation; let’s zero out its budget and move that entire investment into our new, high-margin digital services division.”
ZBB is not about spending less; it’s about spending better. It ensures that every dollar is working as hard as possible in the current economic context.
The ZBB Process: A High-Level Overview
Implementing ZBB is a significant undertaking. It generally involves these key stages:
1. Defining “Decision Units”
The company is broken down into the lowest level at which budget decisions are made. This could be a department, a product line, or a specific project.
2. Creating “Decision Packages”
This is the core of the work. For every activity a decision unit wants to perform, they must create a “package.” A decision package is a business case that includes:
- Purpose: What is this activity?
- Consequences of not doing it: What happens if we fund this at zero?
- Performance Measures: How will we know if the money was spent well?
- Alternative courses of action: Can this be done cheaper? Outsourced?
- Costs and Benefits: The requested budget and the expected ROI.
Crucially, managers are often asked to prepare different levels of service. For example: “What can your IT helpdesk achieve with $500k? What about $750k? What about $1M?” This gives leadership a menu of options rather than a single “take it or leave it” number.
3. Ranking and Prioritizing
Management takes all these decision packages across the entire organization and ranks them against the company’s strategic goals.
In high inflation, cash preservation or high-margin sales might be the top priority. Packages that directly support these goals get ranked higher.
4. Allocating Funds
The company works down the ranked list, funding packages until the money runs out.
Packages that used to get funded automatically under incremental budgeting (the “sediment”) might find themselves ranked at the bottom and cut entirely, freeing up capital for critical needs.
ZBB vs. Incremental Budgeting: The High Inflation Showdown
Why is ZBB winning right now? Let’s look at the direct comparison in the context of inflationary pressure.
Agility vs. Rigidity
Incremental: Rigid. You set the budget once, and it becomes a constraint. When inflation hits, variances explode, and the budget becomes a useless piece of paper that everyone ignores. ZBB: Agile. Because you understand the drivers of every cost (thanks to the decision packages), you can quickly pivot. If energy costs soar, you know exactly which lower-priority projects to pause to cover the gap.
Strategic Alignment vs. Historical Inertia
Incremental: Funds history. It implicitly assumes the future will look like the past. It continues to fund things because “we’ve always done it that way.” ZBB: Funds strategy. It forces a conversation about what is important now. If inflation has made a certain product line unprofitable, ZBB exposes it immediately, whereas incremental budgeting might hide that loss for years.
Cultural Impact: Accountability vs. Entitlement
Incremental: Fosters entitlement. “That’s my budget.” It encourages gaming the system and spending unnecessarily at year-end to protect turf. ZBB: Fosters accountability and ownership. Managers become business owners. They have to deeply understand their cost structures and justify their existence. It eliminates the “use it or lose it” mentality because next year’s budget is zero regardless of what you spend this year.
Let’s be brutally honest: the way most companies handle their budgets is broken. For decades, the annual budgeting season has been a predictable, if tedious, corporate ritual. Department heads dust off last year’s spreadsheets, add an arbitrary percentage—say, 5% or 7%—to cover expected growth and minor price increases, and submit it for approval. There’s a bit of haggling, a bit of trimming, and eventually, a budget is finalized.
This is called incremental budgeting. And for a long time, in stable economies with predictable 2% inflation, it worked “good enough.” It was easy, it required minimal friction, and it kept the wheels turning.
But we are no longer living in stable times. We are operating in an economic landscape defined by volatility and, most critically, high inflation.
In this new reality, relying on last year’s numbers as a baseline for next year’s spending isn’t just lazy budgeting; it’s financial negligence. The assumptions that held true twelve months ago are now obsolete. Supply chains are snarled, energy costs are erratic, and labor costs are surging.
When the very foundation of your costs is shifting like quicksand, simply adding 10% to last year’s budget doesn’t account for reality. It just compounds past inefficiencies while failing to address present dangers.
This realization is triggering a massive shift in the corporate finance world. CFOs and business leaders are realizing that to survive—and even thrive—during this inflationary period, they need a radical departure from the status quo. They are ditching the comfort of incrementalism and embracing the rigors of a returning champion: Zero-Based Budgeting (ZBB).
ZBB is not a new concept, but its relevance has never been greater. It’s a methodology that demands you start from scratch—zero—every single cycle. Every dollar spent must be justified on its own merits today, not simply because it was spent yesterday.
In this extensive deep dive, we will explore why the old guard of incremental budgeting is failing under inflationary pressure, what Zero-Based Budgeting truly entails (and why it has a bad reputation), and how companies are successfully implementing ZBB to regain control, discover hidden value, and navigate the stormy seas of high inflation.
Understanding the Old Guard: The Comfort Trap of Incremental Budgeting
Before we understand why ZBB is the necessary solution, we must first deeply understand the problem it solves. Why has incremental budgeting been the dominant standard for so long, and what are its inherent flaws?
The “Last Year Plus X%” Mentality
Incremental budgeting is beguilingly simple. The premise is that the current budget is a stable foundation. The company is operating, lights are on, and products are shipping. Therefore, the budget for the upcoming year should be the current year’s actual spend, adjusted for known factors.
Typically, these factors are:
- Inflationary adjustments: Adding a small percentage across the board to account for standard cost-of-living increases.
- Growth projections: Adding resources to support revenue targets (e.g., “We need two more salespeople to hit the 15% growth target”).
- Known cuts: Removing one-time expenses from the previous year.
It sounds reasonable. It’s efficient in terms of time spent budgeting. It doesn’t rock the boat. Department heads know the drill: if you got $1 million last year, ask for $1.1 million this year, expect to get cut back to $1.05 million, and everyone goes home happy.
Why It Worked in Stable Times
We cannot fault companies for relying on this method for decades. In an environment where inflation hovers around 2% annually, year-over-year variances are minimal. The “historical base” of spend is a reliable predictor of the future.
If your office rent increased by 3% a year for ten years straight, incremental budgeting handles that perfectly. If raw material costs were hedged and stable, there was no need to reinvent the wheel every twelve months.
Furthermore, incremental budgeting is politically easy. It avoids difficult conversations. By accepting the previous year’s base as “approved,” management doesn’t have to challenge the existence of entire departments or legacy projects every year. It maintains organizational peace.
The Hidden Dangers of Incrementalism (Even Without Inflation)
However, even in the best of times, incremental budgeting is deeply flawed. It is an approach that inherently fosters mediocrity and inefficiency.
The “Use It or Lose It” Phenomenon
Perhaps the most damaging psychological effect of incremental budgeting is the end-of-year spending spree. Because budgets are based on the previous year’s actual spend, managers are terrified of coming in under budget.
If a manager saves $50,000 through efficiency in Q3, they know that if they return that money to the company treasury, their baseline budget for next year will be cut by $50,000. Their reward for efficiency is a smaller empire next year.
So, what happens in November and December? They buy new office furniture they don’t need. They pre-pay vendors. They attend expensive conferences. They ensure every dime is spent to protect their baseline. Incremental budgeting actively punishes frugality.
Cementing Inefficiencies
Incrementalism assumes that the baseline spend is necessary and efficient. It almost never is.
Imagine a company subscription to a legacy software platform that costs $100,000 a year. Five years ago, it was vital. Today, only three people log into it because the company migrated to a newer cloud solution. Under incremental budgeting, that $100,000 is part of the “base.” It gets approved automatically, perhaps even with a 3% price hike added. No one questions its existence because they are only looking at the increment, not the base.
Over time, these layers of sediment build up—outdated processes, redundant roles, unused tools—all cemented into the budget because no one ever asks, “Do we still need this?”
The Inflation Catalyst: Why “Business as Usual” is Now Broken
If incremental budgeting was inefficient in stable times, it is downright dangerous in times of high inflation. The economic environment we face today has shattered the assumptions that make incrementalism feasible.
When Historical Data Becomes Irrelevant
The core premise of incremental budgeting is that the past predicts the future. High inflation destroys that premise.
When inflation goes from 2% to 8% or 10%, the historical baseline becomes meaningless. Last year’s $1 million budget might only buy $900,000 worth of goods and services today.
If you simply apply a standard “plus 5%” increase to a department’s budget when the actual costs of their inputs—energy, logistics, specialized labor—have risen by 15%, you are effectively handing them a massive budget cut. You are setting them up to fail.
Conversely, some costs might not rise at all. Applying a blanket inflationary increase across all departments overfunds some areas while starving others. The lack of granularity in incremental budgeting makes it impossible to manage real-time inflationary pressures precisely.
The Spiral of Rising Input Costs
Consider a manufacturing firm. In a stable year, they might budget for a 3% increase in raw steel costs.
In a high-inflation environment driven by supply shocks and geopolitical instability, steel prices might jump 40% in a quarter, then drop 10%, then rise another 20%. Energy costs to run the factory might double. Shipping containers might go from $3,000 to $15,000 and back down to $8,000.
How does an incremental budget handle this? It can’t. The variances are too extreme. A budget set in November is laughable by March. Companies relying on incrementalism find themselves constantly re-forecasting, chasing their tails as actuals blow past budgets month after month.
The Danger of Autopilot in Volatile Times
Think of budgeting like driving a car. Incremental budgeting is like using cruise control on a long, straight, empty highway. It works fine.
High inflation is like suddenly driving off-road into a mountainous terrain during a blizzard. If you leave the cruise control set to 65 mph (the “last year plus X%” approach), you will crash. You need to take manual control of the wheel, the gas, and the brakes. You need to constantly assess the terrain ahead.
High inflation demands agility. It demands the ability to rapidly reallocate capital from low-priority areas to cover surging costs in critical areas. Incremental budgets are rigid cages; they do not allow for this necessary agility.
The Challenger Returns: What is Zero-Based Budgeting (ZBB)?
Enter Zero-Based Budgeting. ZBB is the methodology best suited for volatile, inflationary environments because it removes the reliance on historical assumptions.
Starting from Scratch: The Core Philosophy
The definition of Zero-Based Budgeting is simple, though its execution is complex: At the start of every budget cycle, every department starts with $0.
There is no baseline. There is no entitlement to last year’s funds. Every single expense, from a paperclip to a multi-million dollar marketing campaign, must be justified anew based on its expected return and its alignment with current strategic priorities.
If the Marketing department wants $5 million this year, they cannot say, “Well, we had $4.8 million last year.” They must build a case from the ground up: “We need $X for digital ads which will generate Y leads; we need $Z for this trade show which yields these key accounts.”
ZBB shifts the burden of proof. In incremental budgeting, finance has to prove why a manager shouldn’t get the money. In ZBB, the manager has to prove why they should get it.
It’s Not Just About Cutting: ZBB as a Growth Engine
ZBB has a PR problem. In the 80s and 90s, private equity firms often used “Zero-Based Budgeting” as a euphemism for brutal, slash-and-burn cost-cutting before flipping a company. It earned a reputation for being Draconian, morale-killing, and shortsighted.
Modern ZBB is different. While it is an incredibly effective tool for cost containment, its true power lies in strategic reallocation.
In a high-inflation environment, you will inevitably face rising costs that you cannot avoid (e.g., electricity for the factory). To pay for those, you must find savings elsewhere. ZBB allows you to identify the “fat”—the legacy software, the unproductive initiatives—and surgically remove them.
Crucially, those savings aren’t just pocketed. They are redirected. ZBB allows a company to say: “This old product line is no longer profitable due to inflation; let’s zero out its budget and move that entire investment into our new, high-margin digital services division.”
ZBB is not about spending less; it’s about spending better. It ensures that every dollar is working as hard as possible in the current economic context.
The ZBB Process: A High-Level Overview
Implementing ZBB is a significant undertaking. It generally involves these key stages:
1. Defining “Decision Units”
The company is broken down into the lowest level at which budget decisions are made. This could be a department, a product line, or a specific project.
2. Creating “Decision Packages”
This is the core of the work. For every activity a decision unit wants to perform, they must create a “package.” A decision package is a business case that includes:
- Purpose: What is this activity?
- Consequences of not doing it: What happens if we fund this at zero?
- Performance Measures: How will we know if the money was spent well?
- Alternative courses of action: Can this be done cheaper? Outsourced?
- Costs and Benefits: The requested budget and the expected ROI.
Crucially, managers are often asked to prepare different levels of service. For example: “What can your IT helpdesk achieve with $500k? What about $750k? What about $1M?” This gives leadership a menu of options rather than a single “take it or leave it” number.
3. Ranking and Prioritizing
Management takes all these decision packages across the entire organization and ranks them against the company’s strategic goals.
In high inflation, cash preservation or high-margin sales might be the top priority. Packages that directly support these goals get ranked higher.
4. Allocating Funds
The company works down the ranked list, funding packages until the money runs out.
Packages that used to get funded automatically under incremental budgeting (the “sediment”) might find themselves ranked at the bottom and cut entirely, freeing up capital for critical needs.
ZBB vs. Incremental Budgeting: The High Inflation Showdown
Why is ZBB winning right now? Let’s look at the direct comparison in the context of inflationary pressure.
Agility vs. Rigidity
Incremental: Rigid. You set the budget once, and it becomes a constraint. When inflation hits, variances explode, and the budget becomes a useless piece of paper that everyone ignores. ZBB: Agile. Because you understand the drivers of every cost (thanks to the decision packages), you can quickly pivot. If energy costs soar, you know exactly which lower-priority projects to pause to cover the gap.
Strategic Alignment vs. Historical Inertia
Incremental: Funds history. It implicitly assumes the future will look like the past. It continues to fund things because “we’ve always done it that way.” ZBB: Funds strategy. It forces a conversation about what is important now. If inflation has made a certain product line unprofitable, ZBB exposes it immediately, whereas incremental budgeting might hide that loss for years.
Cultural Impact: Accountability vs. Entitlement
Incremental: Fosters entitlement. “That’s my budget.” It encourages gaming the system and spending unnecessarily at year-end to protect turf. ZBB: Fosters accountability and ownership. Managers become business owners. They have to deeply understand their cost structures and justify their existence. It eliminates the “use it or lose it” mentality because next year’s budget is zero regardless of what you spend this year.
Implementing ZBB Without Mutiny: A Human Approach
If ZBB is so great, why doesn’t everyone use it all the time? Because it is hard.
It requires vastly more effort than incremental budgeting. It demands time from managers who are already stretched thin. If rolled out poorly, it can feel like an Inquisition, leading to resentment and “budget fatigue.”
Companies successfully returning to ZBB today are doing it differently than the slash-and-burn era.
Acknowledging the Pain
Successful implementation starts with empathy. Leadership must acknowledge that asking managers to justify every dollar is a massive request. It’s stressful.
The messaging cannot be about “finding people to fire.” It must be about “protecting the company and our jobs from the ravages of inflation by ensuring we are financially healthy.” The “why” must be clearly communicated.
The Role of Modern Technology (Escaping Excel Hell)
In the past, ZBB failed because it collapsed under the weight of thousands of spreadsheets. Trying to manage decision packages for a large enterprise in Excel is impossible.
Today, modern Enterprise Performance Management (EPM) software (like Anaplan, Oracle EPM, or specialized ZBB tools) makes the process manageable. These tools handle the workflow of creating packages, rolling them up for review, and creating various scenario models.
Technology allows finance teams to focus on analysis rather than data entry. Without these tools, a full ZBB implementation is likely destined to fail.
Focusing on “Smart Costs,” Not Just “Cost Cutting”
A humane ZBB approach distinguishes between different types of costs:
- Strategic Costs: Investments that fuel growth and competitive advantage. ZBB often increases funding here.
- Required Costs: Things you must pay to keep the doors open (utilities, regulatory compliance). ZBB seeks to procure these as efficiently as possible.
- Discretionary Costs: Travel, training, new initiatives. These are scrutinized most heavily.
By categorizing costs, employees understand that the goal isn’t to make their working lives miserable by cutting the coffee budget, but to free up money from non-essentials to ensure the company can afford the rising cost of essentials.
Hybrid Approaches (ZBB on Rotation)
To avoid burnout, many companies don’t “zero base” everything every year. They might use a hybrid approach.
They may zero-base highly variable areas like Marketing, Travel, and R&D every year. But for relatively stable areas like payroll for core operations, they might only do a full ZBB review every three years, using lighter-touch budgeting in between. This “rotational ZBB” keeps the discipline alive without paralyzing the organization with perpetual budgeting paperwork.
Conclusion
The era of easy money and low inflation is over, at least for the foreseeable future. Clinging to incremental budgeting in this environment is akin to navigating a storm using a map from 2019. It is a recipe for slow-motion failure, where inefficiencies compound and inflation erodes margins until it’s too late to react.
Zero-Based Budgeting is returning not as a villain, but as a necessary discipline. It is the financial equivalent of high-intensity interval training—it hurts while you are doing it, but it makes the organization leaner, faster, and more resilient.
By ditching the “last year plus X%” mentality and demanding that every dollar justify its existence against current realities, companies can turn the challenge of high inflation into an opportunity. They can clear out the dead wood of legacy spending and reinvest in the strategies that will define their future.
ZBB is no longer just a finance tool; it is a survival tactic for the inflationary age.
FAQs
Isn’t Zero-Based Budgeting just a fancy term for massive layoffs?
No. While ZBB can identify redundant roles, its primary goal is strategic reallocation, not just headcount reduction. Modern ZBB is about moving money from low-value activities to high-value activities. In high inflation, it’s often used to find savings in non-essentials to cover the rising costs of essential materials and labor, actually protecting core jobs.
ZBB seems incredibly time-consuming. Is the effort worth it?
It is very time-consuming, especially the first year you implement it. However, in a high-inflation environment, the “easy” method of incremental budgeting often leads to massive budget variances that require constant, frantic re-forecasting throughout the year. ZBB puts the hard work upfront, creating a more realistic budget that requires less firefighting later.
Can small or mid-sized businesses (SMBs) use ZBB, or is it just for giant corporations?
SMBs can absolutely use ZBB, and often more effectively because they have less complexity. An SMB might not need expensive software to do it; a disciplined approach to questioning every cost category can yield massive benefits for smaller organizations operating on tight margins during inflation.
Why does high inflation break incremental budgeting specifically?
Incremental budgeting relies on historical data as a baseline. High inflation means the past cost of goods and services no longer reflects current reality. Adding a flat percentage increase (e.g., 5%) across the board fails to account for the fact that some costs might have risen by 20% (energy) while others didn’t rise at all, leading to wildly inaccurate budget allocations.
Doesn’t ZBB encourage managers to lowball their revenue targets and exaggerate their costs to ensure they look good?
A well-designed ZBB process prevents this through rigorous challenge sessions. Because managers have to build “decision packages” detailing exactly how money will be spent and what outcomes it will achieve, leadership can scrutinize the assumptions. If a manager asks for $1 million but promises very little return, that package will be ranked low and likely unfunded.
