Zero-based budgeting in Corporate Performance Management (CPM) software refers to a budgeting technique that involves building a budget from scratch every budgeting period without reference to previous periods. Each department starts with a skeleton or zero budget and must justify each expense to be included in the new budget.
Scenario: A global manufacturing company uses CPM software for its financial planning. The traditional incremental budgeting method used by the company tends to favor existing expenses and overlook any wasteful or unproductive costs.
Solution: To encourage cost consciousness, the company decides to use zero-based budgeting as an alternative budget version in its CPM software. Through this, each department is required to justify every expense before it can be included in the budget, ensuring that resources are allocated more efficiently, and only productive expenses are approved.
Zero-based budgeting can be time and resource intensive as it entails a thorough review of every expense. Make sure your organization can handle the rigor that this requires and consider if the outcome is worth the work. ZBB sounds good to the extremely cost-focused executive, but often the final result is not much better than using drivers or other methods - but takes 10x as long.
Just about all CPM tools allow this, as a ZBB is essentially blank. For companies looking to justify individual expenses, this can be done as supporting detail in a cell (separate requirement) or as a supporting sheet (also a separate requirement).