How Zero Based Budgeting Can Help You

Zero based budgeting is a substitute planning approach that is at times used by the government but not non profit economy sectors. In this planning, budgeting starts from a zero base and every other function within a company is examined for its requirements and costs. Budgets are then made around what is required for the new fiscal year regardless of whether the budget is above or lower than the previous one. In this budgeting strategy, top level management goals are implemented into the process of budgeting by integrating them to specific functional areas of the organization. Here, costs are classified and measured against previous budgets and current expectations. This kind of budgeting can also be used by individuals where one budgets in a way that his total income less total expenses amounts to zero. That means that every penny of your overall income is assigned to an expense category. That is to say that you spend all your income on paper before spending it in actual life in a layman’s language.

What characteristics make zero based budgeting different from traditional budgeting?

In zero budgeting, you are required to validate and prioritize all activities before assigning any resources or money. In this type of budgeting, you are obliged to group all applicable activities into decision packages. That means that you validate each one of them in terms of the organization ultimate business objectives. As opposed to traditional budgeting, all business budgets start from a zero base by validation of all spending requests in detail. The zero base is unconcerned by whether the total budget is increasing or decreasing. One of the characteristics that make this method of budgeting stand out is how it augments good decision making and planning for businesses.That is because it overturns the working process of the traditional budget forecasting methods. Contrary to ordinary budgeting, previous levels of expenditure are not made reference to. In ordinary budgeting managers only needs to validate hikes over previous budgets meaning that previous expenditure becomes automatically sanctioned. In the case of zero budgeting all business functions and associated expenses are thoroughly reviewed rather than approving only increases.

Advantage of Zero Based Budgeting

Zero based budgeting has very many benefits. One of the main benefits being that this type of budgeting promotes proper resource allocation on the basis of requirements and benefits. There is also an increased staff motivation by provision of higher initiative and responsibility in decision making. This method of budgeting can also be used to eliminate wasteful and obsolete operations. Managers are also driven to establish cost effective ways to improve operations. Through zero based budgeting, it is possible to detect overstated forecasts.

Disadvantages of Zero Based Budgeting

In zero based budgeting, defining decision units and packages is hard as it is very involving and tiresome.This method too forces you to validate every expenditure related details threatening some of the functions like research and development at the benefit of production. This budgeting method requires organizations to train their managers so that they can unmistakably understand the method to make its implementation successful. Zero budgeting is highly dependent on a manager’s honesty to avoid overstatement that might distort the results of the budget.