Zero Based Budgeting : What Is It And How To Apply?
As the name implies, zero-based budgeting (ZBB) is a budgeting technique that starts from scratch every budget cycle, rather than using previous budget figures as a starting point. This approach requires managers to justify every expense in their budget, as if they were starting from zero.
In this article, we will explore the concept of zero-based budgeting, its advantages and disadvantages, the steps involved in implementing it, and some real-life examples of companies that have successfully adopted ZBB.
What Is Zero-Based Budgeting?
Zero-based budgeting is a budgeting technique that requires managers to justify every expense in their budget from scratch, rather than using previous budget figures as a starting point. The goal of ZBB is to identify and eliminate unnecessary expenses while ensuring that resources are allocated to the highest priority areas.
ZBB involves breaking down the budget into decision units, which are the smallest units of an organization that can make decisions about expenses. Managers are then required to evaluate and rank expenses within each decision unit, allocating resources to the highest priority areas until the budget is fully allocated.
The Advantages of Zero-Based Budgeting
One of the biggest advantages of zero-based budgeting is that it helps to identify and eliminate unnecessary expenses. By starting from scratch every budget cycle, managers are forced to justify every expense in their budget, which can lead to significant cost savings. ZBB also promotes a culture of cost-consciousness within an organization. Since managers are required to evaluate and rank expenses, they become more aware of the costs associated with their activities and are more likely to look for ways to reduce costs. Another advantage of ZBB is that it helps to align resources with strategic objectives. By evaluating and ranking expenses, managers can ensure that resources are allocated to the highest priority areas, which can help to achieve strategic objectives more efficiently.
The Disadvantages of Zero-Based Budgeting
One of the biggest disadvantages of zero-based budgeting is that it can be time-consuming and resource-intensive. Since managers are required to justify every expense from scratch, the budgeting process can take longer and require more resources than traditional budgeting techniques. ZBB also requires a significant amount of management buy-in and support.
Since ZBB involves breaking down the budget into decision units, managers need to be willing to take ownership of their expenses and be willing to make difficult trade-offs between competing priorities. Finally, ZBB can be more difficult to implement in organizations with complex structures or large numbers of decision units. Since ZBB requires managers to evaluate and rank expenses within each decision unit, it can be more difficult to implement in organizations with many decision units.
How Does Zero-Based Budgeting Work?
The first step in creating a zero-based budget is to identify all of your expenses, including fixed costs such as rent and utilities, as well as variable costs such as groceries and entertainment. Once you have a comprehensive list of your expenses, you will need to categorize them by priority and importance. Next, you will need to allocate funds to each category based on their priority. This means that you will need to decide how much money to allocate to each category and then adjust your spending accordingly. In some cases, you may need to cut back on expenses in certain categories to free up funds for more important ones. Finally, you will need to track your spending and adjust your budget as needed. This may involve making changes to your budget based on unexpected expenses or changes in your income.
Conclusion
Zero-based budgeting is a powerful tool for taking control of your finances and improving your financial situation. By creating a budget from scratch and accounting for every dollar spent, you can gain a better understanding of your finances, improve your accountability, and make more efficient use of your available funds. It is also good to try saving by 50/30/20 method!
