The retail industry has faced significant disruption from the ongoing pandemic. Temporary closures of non-essential businesses forced finance executives to re-evaluate expenditures to offset declining revenue. These pressures required a more tactical approach to the budget process with some organizations considering a more strategic alternative, such as Zero-Based Budgeting (“ZBB”), which can result in sustained savings over the long-term.
ZBB was developed in the late 1960’s and primarily used by the federal government. However, ZBB has experienced a surge in popularity in recent years across the globe as many companies aim to cut unnecessary costs and create budgets that yield long-term savings.
ZBB is a budgeting method that is built completely from scratch, starting from a “zero base.” Each expense line item requires a business purpose to justify its existence in the budget, which then must be approved by management. This is dramatically different from traditional budgeting methods, in which the prior year budgets are used as the baseline, with adjustments made as needed, such as merit increases or known changes to cost of raw materials. Normally, under this traditional approach, management will review only expense line items that exceed a predetermined threshold from the prior year.