Zero-Based Budgeting Explained

The definition
Zero-based vs traditional budgeting

Zero-based budgeting (ZBB) builds each budget from zero instead of starting from last period's numbers. Every expense has to be justified before it goes into the new budget, so spending that nobody can explain drops out. The trade-off is time: justifying every line, including the obvious ones, takes longer than adjusting last year's figures.

Billed publishes this page. The definitions below come from the open textbook Principles of Accounting, Volume 2: Managerial Accounting (OpenStax): section 7.1, Describe How and Why Managers Use Budgets, and the chapter 7 key terms and summary, all opened on October 29, 2026. This is general information, not accounting or tax advice; ask your accountant where judgment is needed.

The definition

OpenStax's chapter 7 key terms define zero-based budgeting as a "budget that begins with zero dollars and then includes in the budget only revenue and expenses that can be supported or justified."

Section 7.1 puts it the same way: "Zero-based budgeting begins with zero dollars and then adds to the budget only revenues and expenses that can be supported or justified." The chapter summary lists it alongside other approaches: "There are various budgeting strategies including bottom-up, top-down, and zero-based budgeting."

Zero-based vs traditional budgeting

OpenStax's figure on the two approaches explains the difference: "Under a traditional budgeting, last year's budget would be the starting point for creating the current budget. Under a zero-based budgeting approach, all budget numbers are derived newly each year or budget cycle."

Traditional: start from last period's budget or actual spending, then adjust each line up or down.
Zero-based: start every line at $0, then add only the amounts you can support with a reason.

Advantages and drawbacks

From OpenStax section 7.1:

Advantage: "The advantage to zero-based budgeting is that unnecessary expenses are eliminated because managers cannot justify them."
Drawback: "The drawback is that every expense needs to be justified, including obvious ones, so it takes a lot of time to complete."
A middle path: "A compromise tactic is to use a zero-based budgeting approach for certain expenses, like travel, that can be easily justified and linked to the company goals."

A simple zero-based process for a small business

Pick the period and the scope. A quarter or a year, and either the whole budget or only some categories, such as software, contractors, marketing and travel.
List what you spent last period by category, so you know what exists. This list is for reference, not the starting point.
Start each line at $0. For each expense, write down what it's for and which goal or piece of work it supports.
Add back only what you can justify, at the amount you can justify.
Compare the result with last period and with a traditional budget built as last period plus a percentage, so you can see what changed and why.
Track actual spending against the new budget each month. See variance analysis.

Worked example: one quarter of overhead

The business and figures here are a sample, invented for this example.

A small design studio budgets next quarter's overhead. Last quarter it spent:

Software subscriptions: $4,200
Freelance support: $9,000
Marketing: $3,000
Travel: $1,800
Office and phone: $2,400
Total: $4,200 + $9,000 + $3,000 + $1,800 + $2,400 = $20,400

Traditional budget (last quarter plus 5%): $20,400 × 1.05 = $21,420.

Zero-based budget, starting each line at $0:

Software: the studio keeps the four tools the team uses every week: $2,700.
Freelance support: only for projects already booked: $7,500.
Marketing: one campaign tied to a sales goal: $3,000.
Travel: one planned client visit: $600.
Office and phone: the lease and phone lines under contract: $2,400.
Total: $2,700 + $7,500 + $3,000 + $600 + $2,400 = $16,200.

The comparison:

Zero-based vs last quarter: $20,400 − $16,200 = $4,200 less.
Zero-based vs the traditional budget: $21,420 − $16,200 = $5,220 less.

The office and marketing lines came out the same, but the studio still had to justify them. That's the time cost OpenStax describes. Each line in the new budget now has a reason attached, which makes the monthly budget-vs-actual review easier.

When it fits and when it doesn't

It fits when spending has grown without anyone reviewing it, after the business changes direction, or for categories that are easy to add to and forget, such as subscriptions.
It's heavy for categories with fixed contracts, or when you don't have time to justify every line. OpenStax's compromise applies: use it for selected categories only.
Keep what you can't cut, such as insurance, compliance and contracted rent, and ask your accountant before cutting anything with tax or legal consequences.

Where Billed fits

Billed publishes this page. Its expense tracking page says an expense in Billed records "who you paid, when, how much and which category it belongs to, with the receipt attached to the same entry", and that "Billed's expense report can group your expenses by category." Its financial reporting page says "Each report can be filtered by date range and exported." A category report for last period gives you step 2's list of what you spent. The budget itself is something you build yourself or with your accountant.

Frequently Asked Questions

What is zero-based budgeting in simple terms?

You build the budget from $0 instead of from last period's numbers, and you add only the revenue and expenses you can justify. OpenStax defines it as a "budget that begins with zero dollars and then includes in the budget only revenue and expenses that can be supported or justified."

How is zero-based budgeting different from traditional budgeting?

A traditional budget starts from last year's budget and adjusts it. A zero-based budget derives every number again each budget cycle, so each expense has to be justified before it's included.

What are the pros and cons of zero-based budgeting?

OpenStax says "The advantage to zero-based budgeting is that unnecessary expenses are eliminated because managers cannot justify them," and the drawback is that every expense, including obvious ones, has to be justified, which takes a lot of time.

Can I use zero-based budgeting for only some expenses?

Yes. OpenStax describes a compromise of using a zero-based approach for certain expenses, such as travel, that can be justified and linked to the company's goals.

How regularly should a small business do a zero-based budget?

There's no set rule. Some businesses use it for one budget cycle after a change, or for selected categories each cycle. Weigh the time it takes against how much spending has grown without review, and ask your accountant if you're unsure.

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