A guide to zero-based budgeting

Many growing companies base their budgets on past spending. However, if founders want more financial clarity and to be thoughtful about spending, zero-based budgeting (ZBB) can help.

With zero-based budgeting, finance teams explain how every dollar is spent, instead of just repeating last year’s budget. This leads to better cash flow management and keeps spending in line with company goals.

This guide explains what zero-based budgeting is, how it works, and the pros and cons of using this method. We’ll also show examples of when ZBB is most useful and how to use modern fintech tools to keep things simple.

For startups, zero-based budgeting (ZBB) means justifying every expense at the start of each budget cycle. With traditional budgeting, your team will adjust last year’s numbers. But with zero-based budgeting, your finance team will start from scratch and decide if each cost should be included. Instead of automatically renewing contractor budgets or software subscriptions, for example, finance teams will check whether these expenses still align with the business’s goals. This approach is different from traditional budgeting, which relies on past spending.

Recently, more businesses have adopted zero-based budgeting to cut costs and ensure that spending aligns with their strategy. For startups that often pivot and change direction, ZBB can be especially useful.

With the zero-based budgeting method, financial leaders can follow these simple steps.

Step 1: Set your business goals

Determine your top priorities, such as focusing on customer acquisition or profitability. 

Step 2: Review each expense category

Go through every expense line by line, including categories such as payroll, marketing, equipment, and suppliers. 

Step 3: Rationalize your expenses

Explain why each cost should be included in the budget. Outline the value it creates and how it supports your current business goals.

Step 4: Rank spending based on impact

Prioritize vital business areas for funding, and reduce or eliminate lower-value costs.

Step 5: Build a new budget

Instead of relying on past budgets, use a zero-based budget that aligns with your current business priorities.

Imagine an online clothing business that’s facing slower sales and rising advertising costs. Under a traditional budgeting framework, the company might automatically renew brand ambassador contracts, continue software subscriptions, and increase its marketing spend. 

But if the company switches to zero-based budgeting, the finance team will review each budget category individually. During this process, they might find that some brand ambassador campaigns are underperforming, inventory spending is too high, and some marketing tools are unnecessary. So, equipped with this information, they might decide to invest more in other areas of the business, such as email marketing and faster shipping to help increase repeat purchases and customer loyalty. Or they might increase the budget for fostering customer retention, with the goal of increasing recurring revenue.

As a result, zero-based budgeting helped this company cut unnecessary costs and focus spending on areas that drive profit growth.

Here are a few key advantages of zero-based budgeting:

• Spending visibility: Using ZBB can bring increased visibility into your company’s spending patterns.
• Cost savings: By challenging automatic budget increases, your team could identify areas to save money.
• Business goals alignment: This budgeting method can help you strategically align business spending with business goals.
• Better handling of cash flow: It can also help you budget in a way that improves cash flow.
• Accountability: Zero-based budgeting can improve accountability and collaboration across different departments.
• Reduced tool sprawl: This process can help you to identify and eliminate duplicate subscriptions and outdated software (aka tool sprawl).

Startups that use zero-based budgeting successfully can improve their cost management over the long term.

Although there are plenty of benefits to ZBB, these are the disadvantages of zero-based budgeting, which financial teams should be aware of, including:

• Time: Building a budget from scratch can be time-consuming and complex. 
• Bottlenecks: Regularly justifying costs can become tedious and create bottlenecks. And if your ZBB process is unclear, it can create operational inefficiencies.
• Team-wide adoption: Teams may revert to a short-term mindset rather than focusing on long-term goals.
• Might be a mismatch for some businesses: It may not be feasible for businesses with limited funding or resources. Plus, investing in building a ZBB process could include a level of operational risk, since the potential cost savings are unclear.

Because of these challenges, many businesses begin with a lighter ZBB approach. As they get more comfortable, they might move on to reviewing every expense in detail.

Traditional budgeting focuses on looking at historical spending and making adjustments from that starting point. On the other hand, zero-based budgeting begins with a blank canvas and builds the budget from scratch, with a focus on intention. 

Here’s a quick overview of the two types of budgeting methods.

If your business is well-established with steady expenses, traditional budgeting might be best. But if you’re a lean startup or growing quickly, zero-based budgeting could suit your company better, since it helps you adapt to changing markets and changing business directions.

Zero-based budgeting is especially helpful when a startup is facing financial challenges or going through changes, such as:  

• Needing to extend cash runway
• Looking to reduce overspending and maintain profit margins
• Experiencing rapid growth and expansion
• Having redundant software or operational expenses
• Facing challenging market conditions
• Preparing for a funding round

When founders expect funding to be harder to get, using ZBB can be worthwhile, since this approach can help control costs and support steady business growth.

If you’re juggling many roles at a startup, your time matters. Finance teams can apply ZBB principles in a structured way without reducing operational efficiency. Here are some ways to keep your budget on track.

Prioritize high-impact spending

Focus on spending categories that typically support growth initiatives, such as marketing, SaaS subscriptions, operating expenses, and contractors. 

Use automation to track spending

Using a finance platform with built-in automations can help your team easily keep track of subscription renewals, generate real-time reports, categorize transactions, and reveal areas of overspending — and reduce the need for manual work.

Establish approvals for low-risk expenses

To prevent payment delays, create auto-approvals for expenses that don't require executives to review.

The right zero-based budgeting tools can make things easier for startups. Modern options — like expense tracking software, real-time cash flow dashboards, spend management tools, and financial reporting features — can save your team time and reduce manual tracking errors .

When searching for an all-in-one platform that’s a match for your business, look for options that offer real-time financial insights and tools for handling essential processes, such as budgeting workflows, transaction reports, integrated accounting, forecasting, and automated approvals. These tools help finance teams make quicker and better decisions.

When done right, zero-based budgeting helps startups align spending with their goals and manage cash flow more effectively. Modern fintech platforms, like Mercury, help businesses automate spending controls, speed up approvals, and give real-time expense reports. Instead of reviewing spreadsheets by hand, finance leaders can use these tools to make quicker, data-driven decisions that support growth. Mercury’s built-in financial workflows provide real-time visibility to help teams make faster, clearer budgeting decisions, based on a single source of truth.

Is zero-based budgeting useful for startups?

Yes, zero-based budgeting can help startups manage their burn rate and shift funding towards high-impact areas. It also provides flexibility by ensuring every expense is justified and aligned with the organization’s business goals. 

When should businesses use zero-based budgeting?

It’s most useful when businesses are experiencing fast growth or preparing for fundraising. In times of financial pressure when cost-cutting is required, ZBB can also help control spending.

With zero-based budgeting, what are the advantages and disadvantages?

The benefits of zero-based budgeting include better financial visibility and stronger strategic alignment, which can help teams to eliminate redundant spending. The drawbacks are that it can be time-consuming and may require more administrative work.