Zero-Based Budgeting

A zero-based budget is created when the budget developers of an organization start with zero dollars, choose what programs they want to implement for the year, and budget funds accordingly. Zero-based budgeting (ZBB) requires budget developers to justify each budgeted expense and does not allow them to rely on inflated increases from the prior year. Budget developers must outline, in writing, how they plan to use ministry money for ministry results.

The development and implementation of the ZBB model requires managers and others in the organization to engage in several major planning, analytical, and decision-making processes. These major processes of ZBB include the following:

  • Definition of the Mission and Goals of the Organization

    Usually the organization has already established its mission and goal statements. However, it may be necessary to redefine the ones that are already in existence and/or create new ones. This redefinition is particularly useful after major changes in the internal and external environment of the organization.
  • Identification of the Organization’s Decision Units and Decision Packages

    A ZBB decision unit is an operating division for which decision packages are to be developed and analyzed. It also can be described as a cost or a budget center. Managers of each decision unit are responsible for developing a description of each program to be operated in the next fiscal year or years. In ZBB, these programs are referred to as decision packages, with each decision package usually comprising three or more alternative ways to achieve the decision package’s objectives. Briefly, each decision package alternative minimally must contain goals and/or objectives, activities, resources, and their dollar costs. The decision package also should contain a description of how it contributes to the mission and goals of the organization.
  • Analysis of Each Decision Package

    This analytic process allows the manager of the decision package and its alternatives to assess and justify its operation. Several questions should be asked and answered during the analytical process.
  1. Does this decision package support and contribute to the goals of the organization?
  2. What would be the result to the organization if the decision package were to be eliminated?
  3. Can this decision package’s objectives be accomplished more effectively and/or efficiently? This question will require creative planning by the person(s) developing the decision package.
  • Ranking of Decision Packages

    The ranking process is used to establish a rank priority of decision packages within the organization. During the ranking process, managers and their staff will analyze each of the several decision package alternatives. The analysis allows the manager to select the one alternative that has the greatest potential for achieving the objective(s) of the decision package. Ranking is a way of evaluating all decision packages in relation to each other. Since there are any number of ways to rank decision packages, managers will no doubt employ various methods of ranking. The main point is that the ranking of decision packages is an important process of ZBB.
  • Acceptance and Allocation of Resources

    Following a review and analysis of all decision packages, managers will determine the level of resources to be allocated to each decision package. Managers at different levels of responsibility in the organization usually perform the review and analysis. Sometimes the executive levels of management may require the managers of the decision packages to revise and resubmit their decision packages for additional review and analysis.
  • Budget Preparation

    The organization’s budget is prepared following the acceptance and approval of the decision packages. Once the organization’s budget has been approved, managers of the decision units will put into operation during the next fiscal year all approved decision packages.
  • Monitoring and Evaluation

    The last major process of ZBB is monitoring and evaluation. The processes of planning, analyzing, selecting, and budgeting decision packages prepares the organization for operation during the next year. However, what managers plan to happen in the next fiscal year may or may not occur. Adjustments may be essential during the year in order to achieve the decision package objectives. Additionally, there is a need to know whether or not the organization did accomplish what it set out to achieve and at what level of achievement.

Summary. ZBB addresses and supports comprehensive planning, shared decision-making, the development and application of strategies, and allocation of resources as a way of achieving established goals and objectives. ZBB supports the added processes of monitoring and evaluation. When properly implemented, ZBB can assist managers to:

  1. Develop and/or modify their organization’s mission and goals
  2. Establish broad policies based on the mission and goals
  3. Efficiently identify the most desirable programs to be placed in operation
  4. Allocate the appropriate level of resources to each program
  5. Monitor and evaluate each program during and at the end of its operation
  6. Report the effectiveness of each program

ZBB holds great promise for assisting organizational personnel in planning and making decisions about the most efficient, effective ways to use their available resources to achieve their defined mission, goals, and objectives.

The preceding information is from S.W. Bliss and Associates, Inc. For more information, visit

This text is provided with the understanding that ECFA is not rendering legal, accounting, or other professional advice or service. Professional advice on specific issues should be sought from an accountant, lawyer, or other professional.