Zero-based budgeting

In this lesson

1. 0:00 Zero Based Budgeting Introduction
2. 0:18 Key Characteristics and Best Use Cases
3. 1:27 Decision Packages Explained
4. 2:52 Step by Step Implementation Process
5. 4:17 Benefits of Zero Based Budgeting
6. 5:24 Limitations and Practical Challenges
7. 7:12 Cultural Considerations and Organisational Fit
8. 8:27 Zero Based Budgeting in Practice

About this lesson

It's particularly valuable for discretionary activities and organisations prioritising innovation, though it's time-consuming and best used every few years rather than annually to balance rigour with practicality. Zero-based budgeting forces a complete re-evaluation of all activities and costs, eliminating budgetary slack and obsolete spending. The process uses decision packages—ranked options showing different service or activity levels—which managers prioritise based on available funds. This bottom-up approach increases staff involvement and encourages a questioning attitude towards resource allocation, making it ideal for high-tech or fast-changing environments where understanding cost behaviour and spotting inefficiencies matters most. The main drawbacks are the significant time and expense required, difficulty ranking comparable packages, and the risk of cutting long-term investments for short-term savings. Large organisations may find it impractical across all departments, and it can create cultural resistance in traditional businesses. To manage these challenges, many organisations use zero-based budgeting selectively—perhaps every two to three years—combined with incremental budgeting in other years, ensuring you remove obsolete activities without the annual burden.

Duration: 10m