Plain definition
Zero-based budgeting requires each proposed cost to be justified for the coming period from its current purpose, rather than starting with last year’s amount and applying a percentage change. It does not mean every cost is cut to zero. It asks whether the activity is still needed, what it will deliver, and what it will cost.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A marketing team spent on six software subscriptions last year. For the next budget, it identifies that two subscriptions costing support a campaign that has ended, three costing support current lead generation, and one costing duplicates a feature in the company’s main system. The team asks to retain and redirect to a new customer-referral test, leaving uncommitted.
The review does not assume that the lower number is automatically better. It compares the current lead-generation evidence with the expected value of the referral test before money is assigned.
| Prior-year subscriptions | |
|---|---|
| Ended campaign subscriptions | |
| Duplicated subscription | |
| Current lead-generation subscriptions |
This method is most demanding when applied to every small item. Many companies use it selectively for material, discretionary, or rapidly changing cost areas.
Why it matters
An incremental budget can preserve services that solved an old problem but no longer help the business. During cash pressure, that error turns a historical allocation into a claim on scarce funds. Zero-based review makes the choice visible before the subscription renews or the spending becomes routine again.
Practical consequence
Set a review threshold and give each cost owner a short decision case: business purpose, users or activity served, annual cash cost, alternative, evidence of benefit, and consequence of stopping it. Have finance verify the contractual amount and renewal date, then rank competing requests against the available envelope. Keep genuinely necessary compliance or safety costs separate from discretionary experiments; a zero-based process should not create artificial uncertainty around obligations the company must meet.