A zero-based budget (ZBB) is a budgeting method where every expense must be justified, starting from a “zero base.” Unlike traditional budgeting, which adjusts previous budgets or uses historical actual results, ZBB requires a fresh evaluation of all expenses. This approach ensures that all costs are necessary and aligned with current needs, promoting efficient use of resources
Manufacturing Company
Preparing a zero-based budget for a manufacturing company started with an understanding of the components of each GL account. Each vendor contract was identified, each variable cost component, individual salaries and hourly labor. Utilities were broken down to individual budgets for phone, electricity, gas and sewer.
- Budgeted sales based on targets set by the sales team, generating KPIs for each sales person.
- Raw materials and packaging: Budgeted production was based on budgeted sales. Using the bill of materials (BOM) for each item produced, multiplied by the quantity to be produced of each product, generated the budget for each raw material and each of many packaging items.
- Each salaried employee was budgeted with estimated raises and bonuses.
- Hourly employees were budgeted based on anticipated need to fulfill the budgeted production, and hourly rates including raises.
- Maintenance costs were estimated based on historical results (not zero-based). There was no way to anticipate which parts or equipment would need to replaced.
- Contracts for cleaning and rent were budgeted based on agreed contractual terms.
This budget was an investment in time, but resulted in thoughtful KPIs and clear visibility of waste, overages and profit opportunities.
- KPIs were aligned with the budget and based on specific logic.
- As the year progressed, the underlying details provided for accurate forecasts while incorporating changes in sales and production.
- The company achieved significant cost savings through this effort.
