McKinsey Classics | February 2023

Dispelling the mystery of zero-based budgets

Back in 2014, many companies found that their revenues were growing more slowly than their sales, general, and administrative (SG&A) costs were. Controlling those costs became essential. At such times, executives often think they have to make large, arbitrary budget cuts, no matter how imprudent or unsustainable. But a McKinsey team argued that companies had a better choice: zero-based budgeting (ZBB).

ZBB does involve “building a budget from zero,” but it is also very much more: a repeatable process that organizations can use to scrutinize every part of the annual budget, rethink their processes, manage their financial performance, and implant a cost management culture among employees. A best-practice ZBB program exposes all cost drivers and uses the findings to set aggressive but realistic budget targets. Executives and managers can then understand and debate the company’s finances and work.

ZBB can cut SG&A budgets by 10 to 25 percent, often within six months. Yet it remains a mystery for many executives. At a time when businesses are again trying to rein in costs, you’ll want to read “Five myths (and realities) about zero-based budgeting.”

— Roger Draper, editor, New York