Revision and practice on zero-based budgeting, how it differs from traditional budgeting, and its benefits and drawbacks.
Key vocabulary: Zero-Based Budgeting, Traditional Budgeting, Justification
Key Concepts
Traditional vs Zero-Based Budgeting
Traditional budgeting starts with last year's budget (e.g. £100,000) and adds a percentage for the new year (e.g. +5% for inflation = £105,000). It's a bit like an app subscription that renews automatically — quick and easy, but you might end up paying for something you no longer need or use.
Zero-based budgeting starts with a budget of £0. Every department must justify every single pound it wants to spend, from scratch — like deciding every month, from first principles, whether that app subscription is still worth renewing at all.
How Zero-Based Budgeting Works
Zero-based budgeting (ZBB) is a detailed process that forces managers to think carefully about their spending, aiming to eliminate the "we've always done it this way" mentality and reduce wasteful spending. It follows three steps:
Identify objectives: managers first establish what their department needs to achieve in the upcoming period.
Justify resources: for each objective, managers must justify every cost required from the ground up, as if the department was brand new.
Evaluate and allocate: senior management reviews all the requests, challenges them, and allocates funds to the activities that create the most value and best match the company's overall strategic goals.
Benefits of Zero-Based Budgeting
Reduces wasteful spending: eliminates the "we've always done it this way" mentality — if a cost can't be justified, it's cut.
Efficient resource allocation: money goes to the most profitable and strategically important activities, rather than simply being rolled over from the previous year.
Increased accountability: forces managers to take full responsibility for their spending and understand the costs and benefits of their department's activities.
Encourages strategic thinking: prompts managers to find more cost-effective ways to achieve their objectives.
Drawbacks of Zero-Based Budgeting
Extremely time-consuming: justifying every expense from scratch each year is a significant administrative burden on managers.
Requires significant skill and training: managers may not have the financial skills needed to construct and justify a complex budget from zero.
Can be demotivating: some managers feel the process is confrontational, as if they're constantly defending their department's existence.
Can favour short-termism: it can be harder to justify spending on long-term projects like R&D or brand-building, since their benefits aren't always immediate or easy to quantify.
Real-World Case Studies
Kraft Heinz — the best-known real-world example of zero-based budgeting
After Kraft and Heinz merged in 2015 under investor 3G Capital, the combined company became famous for applying zero-based budgeting aggressively across the business, requiring every cost to be justified from scratch. This delivered real short-term results — margins expanded and thousands of jobs and several plants were cut to remove costs that couldn't be justified. But years later, the company's own leadership publicly acknowledged the approach had gone too far: the relentless focus on cost-cutting left Kraft Heinz underinvested in innovation and brand-building, weakening its ability to compete as consumer tastes changed. This is a well-documented real example of exactly the trade-off — short-term efficiency against long-term competitiveness — covered in the concepts above.
Source: verified via search, September 2026 — CNBC, the Robert H. Smith School of Business, and WebProNews coverage of 3G Capital's zero-based budgeting at Kraft Heinz.
Unilever — applying ZBB to marketing budgets
Unilever announced a global zero-based budgeting programme covering its marketing and overhead spending, targeting around €1 billion of annual savings from 2018, on top of €1 billion already saved through its supply chain. Rather than starting from the previous year's marketing budget, Unilever's brand teams had to justify all new spending from scratch. After trialling the approach in Thailand — where it cut marketing spend as a share of sales by 2 percentage points — Unilever rolled it out more widely, joining other major consumer goods companies including Coca-Cola, Heinz and Mondelez in adopting the same technique. Unlike Kraft Heinz's more extreme version, Unilever stated it would continue investing in its brands, particularly digital marketing — an example of using ZBB's discipline without applying it as aggressively.
Source: verified via search, September 2026 — Marketing Week and Just Food's coverage of Unilever's zero-based budgeting programme.
Sort It: Benefit or Drawback of ZBB?
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Quick Knowledge Check
Short, snappy recall questions — tap to reveal the answer.
What does zero-based budgeting start from? (1 mark)
£0 — every cost must be justified from scratch.
What does traditional budgeting start from? (1 mark)
Last year's budget, adjusted by a percentage.
State one drawback of zero-based budgeting. (1 mark)
Any one of: extremely time-consuming, requires significant skill, can be demotivating, can favour short-termism.
Key Term Flashcards
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Zero-based budgeting
A budgeting method that starts from £0 each period, requiring every cost to be justified from scratch rather than carried over from last year.
Traditional budgeting
A budgeting method that starts from last year's budget and adjusts it, e.g. by a percentage for inflation.
Short-termism
Prioritising short-term results (like this year's costs) over long-term investment and competitiveness — a risk of applying ZBB too aggressively.
A*/A Stretch
Examiner's eye
In an evaluation question on ZBB, avoid a simple "it depends on the business" conclusion with no development — instead, name the specific type of business (e.g. a fast-growing tech start-up vs. an established manufacturer) and explain why ZBB would suit one more than the other.
Synoptic link
Connecting to sources of finance (L2, this unit): A business under pressure to reduce its gearing or improve its liquidity (e.g. by cutting costs rather than raising more debt) might turn to zero-based budgeting specifically as a tool to find savings quickly — linking budgeting method directly to financial objectives elsewhere in this unit.
Try This With AI
Before using this: AI tools can get facts or mark scheme details wrong, and quality varies by tool. Always check anything factual against your notes or ask your teacher.
Describe a fictional department in a business (e.g. marketing, IT, or training) and one cost it currently has in its budget. Ask me to argue for or against that cost surviving a zero-based budgeting review, using the justification process (objectives, cost justification, evaluation). Then tell me whether my argument was convincing and what I could add.