Corporate Finance Explained | Zero-Based Budgeting

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Imagine it’s budget season. You’re in a strategy meeting, and you’re looking at the usual proposal. You know, a 5 bump here and there, maybe a little for inflation, and then someone from leadership just drops a bomb. They say no. This year, we start from zero. Every single dollar needs a reason to exist that moment. That is the essence of zero-based budgeting or ZBB. Yeah, and it’s either, um, the most energizing thing to ever happen to your company’s accountability or it’s the start of a corporate civil war. Exactly. It can be so energizing because it forces you to focus on strategy for every single line item, but it can also be terrifying because if you do it wrong, you can well, you can starve the business of what it needs to grow. So our mission in this deep dive is to really unpack how ZBB actually works. We’ll look at the tools where it works, where it fails spectacularly, and crucially, how finance professionals can build a framework around it that keeps the business healthy instead of just cutting it to the bone. So, to get us started. What’s the immediate definition? ZBB is a budgeting approach where you treat every expense as discretionary. Nothing is assumed. You have to justify it every single cycle, even if it was in last year’s budget, and that’s the core tension, right? That’s the core tension. It drives incredible efficiency, but the pressure it creates. Well, when it’s done poorly, you see these huge short-term wins that come at a massive long-term cost. Okay, so let’s start by contrasting ZBB with what most companies are used to, which is traditional budgeting. Of course, traditional budgeting is fundamentally incremental; you take last year’s spending as your baseline, and you adjust it up or down a little for inflation and a few known projects. It’s comfortable. It’s based on precedent, but ZBB just throws that all out the window. It flips the logic completely, incremental asks How much more or less do we need? ZBB asks a much harder question: if we were building this function from scratch right now, today, what would we actually fund, so that the historical baseline is just awful?

[00:02:02 – 00:11:44]
It’s gone. Yeah, and every cost, even things you think of, is fixed, like salaries or software licenses. It technically becomes discretionary right as we tie back to some kind of strategic value that kind of intensity suggests. This isn’t something companies do on a whim. Oh, absolutely not. It’s almost always brought in during a moment of intense pressure. Oh, like what a downturn margin compression? Yeah, or maybe an activist investor gets involved. A big post-merger integration is another classic one, or just when a ceo decides the organization has gotten too complacent. It needs a strategic reset. ZBB forces that confrontation; it shines a light on all those costs that have just built up over the year. Exactly that historical entitlement. It’s like paying for a cable package. You haven’t watched in years, just yeah. Well, canceling’s a hassle. ZBB hits the cancel button on everything. So that brings up a really important question for our finance teams: if the goal is just cutting costs, why not do the old school thing? Just say cut 10 across the board, right? It seems like you get to the same place, right less spending, but the philosophy underneath is completely different A blanket cut is just austerity. It’s blunt; ZBB is about cost discipline. It’s strategic. How so well when you cut 10 everywhere? You’re actually penalizing the teams that were already running lean and rewarding the ones that had all the padding to begin with. Exactly ZBB forces you to understand the actual cost drivers. To assign clear ownership for every dollar and to see how costs scale with the business, or you know, how they don’t, so if a company is starting this, where do they usually focus first? Where’s the biggest impact? The primary target is always salary, general, and administrative expenses, and all the overhead. That’s where costs accumulate almost invisibly. We’re talking professional services contracts, old software licenses, big real estate footprints, and a huge one marketing spend that’s never really been checked for its return on investment. ZBB helps you sort out what’s creating value versus what’s just there. Which means the role of the FP&A team, financial planning and analysis, has to change, right? They can’t just be scorekeepers. It changes dramatically. They become the architects of accountability. So, instead of just a blunt axe, they’re providing a scalpel; their job is deep analysis. Defining cost drivers, setting KPIs for every single request, and then monitoring it all. They’re the bridge connecting the dollar you spend to the outcome you get. Without a strong FP&A team, ZBB is just a spreadsheet exercise that falls apart. Okay, so the tool that lets them do this, to compare something like a new HR system versus a new marketing campaign, is the decision package. What is that exactly? The decision package is the core mechanism. It’s a formal document that outlines a specific activity, not a whole department, but an activity, and it details the cost and the quantifiable benefit. Yes, but the real genius of it, and this is a detail people often miss, is that a good one mandates alternative funding levels? Alternative funding levels. What does that mean in practice? So you usually present three tiers. The minimum level is the bare minimum you need to spend to keep the lights on or stay compliant. Then you have the current level, which is business as usual, and finally, the enhanced level, which is for new investment for growth and innovation. Ah, so you can see the trade-offs exactly, leadership can then look at all these packages and say, Okay, we can only afford the minimum for this administrative function. But we have to fund the enhanced level for new customer acquisition because that drives revenue. It lets you allocate capital based on strategy, not just history. Okay, so let’s get out of the theory and into the real world. Let’s talk about the high-stakes trade-offs, and we have to start with probably the most famous and maybe most aggressive example, Kraft Heinz. Yes, the Kraft Heinz case is essential reading after their merger in 2015, driven by the philosophy of 3G Capital. They adopted a radical form of ZBB. It was stringent, comprehensive, and just Ruthless about extracting cash flow, and the initial results you can’t deny them. They were dramatic margins, shot up, costs were stripped out incredibly fast, cash flow improved. From a purely financial standpoint, the visibility they got was Incredible, unparalleled. They knew exactly who was spending what on what, but here’s the lesson: the methodology they used prioritized immediate margin expansion over everything else, and that led to strategic failure. They cut too deep, way too deep. They cut into marketing, brand building, R&D for new products, and even the capital needed to maintain their own factories. The entire incentive structure was about saving a dollar today, even to cost you 10 tomorrow, and the consequence of that profound brand erosion. The innovation stopped the brand equity from crumbling, and while the short-term numbers looked great, the company eventually had to take billions of dollars in write-downs on the value of those very brands. It’s the perfect example of the biggest danger. It is cost discipline without a guiding strategy; it’s not discipline, it’s just cost destruction. You basically save yourself from obsolescence. So that’s a high-risk, maximum austerity model. Let’s look at the other side, a company that tried to use ZBB’s discipline without, you know, destroying itself. Unilever is a great counterpoint. They brought in ZBB partly in response to that pressure from Kraft Heinz, but they did it completely differently. They weren’t zero-basing the entire company every single year. No, they used a more selective targeted approach. They focused on specific cost categories within SG&A, not the whole organization, and what was the key difference in their execution that protected the brands? It was intentionality. Their finance teams worked very closely with the business leaders to explicitly protect strategic areas, brand building, innovation, and growth initiatives. Those were ring-fenced, and crucially, they had a save to grow mindset, meaning the savings didn’t just disappear. Exactly, the savings they found through ZBB were immediately earmarked for reinvestment in those protected, high-value areas. It shows you how ZBB can be a tool for strategic capital reallocation, not just cutting. Okay, so looking at those two very different outcomes. What does this mean for a finance team trying to do this, right? How do you build a framework that ensures strategy wins? It really has to start with structure and clarity. The best ZBB programs have four key elements. First, you define very clear cost categories and their drivers. So, for it, support the driver isn’t last year’s bill. It’s said that user head count or transaction volume makes sense. What’s number two? Assigning precise ownership at the manager level, the person who owns the activity is the one who has to defend the decision package. Accountability becomes very real very fast, and third is using those tiered decision packages we talked about correctly. So you can compare alternatives against the overall strategy, and the final piece is the hardest, which is that you have to clearly differentiate between running the business costs and changing the business costs. Okay, break that down. Run the business is the non-negotiable stuff paying the light bill regulatory compliance. Change is a discretionary investment in the future. R&D, digital transformation, new markets, if you don’t protect those, change the business costs during ZBB. You are basically guaranteeing long-term stagnation. And a really crucial point here is that ZBB doesn’t have to be this giant organization-wide panic every single year. That flexibility is key to making it sustainable. To avoid burnout, a lot of successful companies apply it every two or three years, or they’ll just apply it to one function at a time. Or maybe, only during a major transition like an acquisition that prevents the constant fighting for every last paper clip, and it prevents institutional knowledge loss, which is what happens when your best people get tired of the fight and leave. So once the framework is in place, the role of FP&A must shift again, right? They’re not just the enforcers anymore, right? They move from enforcement to enablement. The job becomes enabling smarter trade-offs and reallocating capital dynamically through the year, your monitoring requires clear KPIs. And variance analysis has to explain why you deviated from the plan, not just what the variance was. Accountability has to be a behavior, not just a one-time budget event. So let’s bring this all together for you, the listener, if you’re in finance, ZBB can instantly elevate your role. You’re no longer just the scorekeeper. You become a decision partner the whole mindset shifts. You are now expected to challenge assumptions: to quantify trade-offs, to defend or deny spending based on data, not just because we did it last year. It’s a real test of your strategic judgment, and that’s really the lesson from both Kraft Heinz and Unilever, knowing where to cut. Technically, that’s just following a spreadsheet. But knowing we’re not to cut, knowing how to protect investment and growth and brand equity, even when there’s immense pressure to save money. That’s the true test of leadership. That’s the perfect synthesis. ZBB is about intentionality, not austerity. Used well, it sharpens focus, improves transparency, and frees up capital for better uses. Used poorly, we’ve seen it erode capability, destroy trust, and ultimately, it fails the business. The difference isn’t the tool; it’s the culture and the execution. Knowing where to draw that line is everything, and that line depends so much on the company’s culture. If ZBB just becomes this mechanical cut-first, justify-later exercise, you will burn out your teams. You will lose good people. The process has to be seen as an enabling strategy, not undermining it. Which leads to a really important question for you to think about: consider a category in your own business or your field. How many of those activities just exist because of historical precedent? And which ones do you think would actually survive a true start from zero challenge? Where did you have to defend that spending with hard, quantifiable evidence?