What is Zero-Based Budgeting?
Zero-based budgeting (ZBB) is a budgeting method in which all expenses must be justified for each new budget period, regardless of whether they were incurred in the prior budget period. This approach starts from a “zero base” and looks at each budget line item individually, rather than using a previous budget as a starting point. The goal of zero-based budgeting is to ensure that all spending is necessary and productive and to minimize waste and inefficiency.
In ZBB, all expenses must be evaluated and justified based on current business needs and priorities. This includes both recurring expenses and one-time expenditures. The process of zero-based budgeting typically involves identifying all expenses, evaluating their necessity, and making decisions about whether to continue, reduce, or eliminate each expense. The end result is a budget that is optimized for the current period, rather than being based on historical spending patterns.
Zero-based budgeting has been adopted by many organizations, including corporations, government agencies, and non-profits, as a way to reduce costs, increase efficiency, and improve decision-making. By forcing managers to evaluate each expense and justify its need, ZBB can help organizations identify areas where they can reduce spending and improve the allocation of resources.
Features of zero-based budgeting:
The main features of zero-based budgeting (ZBB) include:
- Fresh start: ZBB starts from a “zero base” and does not assume that previous spending levels are valid. Instead, all expenses must be justified for each new budget period.
- Expense evaluation: In ZBB, all expenses are evaluated and justified based on current business needs and priorities. This includes both recurring expenses and one-time expenditures.
- Cost control: The goal of ZBB is to minimize waste and inefficiency by ensuring that all spending is necessary and productive. By forcing managers to evaluate each expense, ZBB can help organizations identify areas where they can reduce spending.
- Decentralized decision-making: ZBB places responsibility for budget decisions with managers at the operational level, who are closest to the activities being funded. This can help ensure that budgets reflect the needs and priorities of each business unit.
- Improved information: ZBB requires managers to provide detailed information about the costs associated with each activity, which can improve the quality of financial information and decision-making.
- Increased accountability: By forcing managers to justify each expense, ZBB increases accountability for budget decisions. This can help reduce the risk of waste and inefficiency and improve the allocation of resources.
- More accurate forecasting: By starting from a “zero base” and evaluating all expenses, ZBB can provide a more accurate picture of future costs and help organizations make better decisions about resource allocation.
What are the disadvantages of zero-based budgeting:
- Time-Consuming: Zero-based budgeting requires significant time and effort to design and implement.
- Resource-Intensive: It requires a lot of resources to implement, including staff time and resources for data analysis and decision-making.
- Resistance to Change: Implementing zero-based budgeting may face resistance from departments and employees who are used to traditional budgeting methods.
- Complexity: The process of zero-based budgeting can be complex, particularly for organizations with large budgets and multiple departments.
- Potential Misalignment: Zero-based budgeting can lead to misalignment between departments, as each one may prioritize its own budget, rather than working towards common goals.
- Short-term Focus: Zero-based budgeting can be focused on short-term cost savings, rather than long-term strategic planning and investment.
