How Zero Based Budgeting Will Help Add Extra Cash To Your Bank Account

It defers from traditional incremental methods which may only require you to explain the amounts you need in excess of the previous period's funding.

For example, if your company used ZBB, each department would have to justify its funding every year. That is, funding would have a base at zero. A department would have to show why its funding efficiently helps the company toward its goals.

Zero based budgeting is especially encouraged for charity and government budgets because expenditures can easily run out of control if it is automatically assumed that what was spent last year must be spent this year.

Unique characteristics

• Requires you to justify and prioritize all activities before allocating any resources.


• All your business forecasts should start from a zero base by justifying all expense requests in complete detail. The zero base is indifferent to whether the total forecast is increasing or decreasing


• Requires you to group all relevant activities into decision packages. You justify each in terms of the companies’ overall business objectives.


• Requires you to rank Packages in order of priority.
• Zero-Base Budgeting is a technique that helps to enhance good planning and decision-making for your business. In other word, it reverses the working process of the traditional forecasting methods you may have been accustomed to.
• In the traditional incremental approach, a manager needs to only justify increases over the previous year’s projections. This means, what has been already spent is automatically sanctioned. In the case of ZBB, you do not make reference to the previous levels of expenditure. You must review every business function comprehensively and all associated expenditures rather than approving only increases.

The term "Zero-Based Budgeting" is sometimes used in personal finance to describe the practice of planning for every dollar of income that you receive, and then adjusting some part of your plan downward for every other part that you may need to adjust upward

Advantages

1. Results in efficient allocation of resources as it is based on needs and benefits


2. Drives managers to find out cost effective ways to improve operations


3. Helps Detects inflated forecasts


4. Useful for service business where the output is difficult to identify


5. Increases staff motivation by providing greater initiative and responsibility in decision-making


6. Increases communication and coordination within the company


7. Identifies and eliminates wastage and obsolete operations.


8. Identifies opportunities for outsourcing.


9. Can encourage managers to look more critically at the way in which services are provided.


10. Forces cost centers to identify their mission and their relationship to overall goals.

Disadvantages

1. Difficult to define decision units and decision packages, as it is very time-consuming and exhaustive.


2. Forces you to justify every detail related to expenditure. As a result activities like research and development are threatened whereas activities like production benefit.


3. Necessitates training of managers. Zero based budgeting should be clearly understood by managers at various levels otherwise it would not be successfully implemented .


4. In a large company, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details.


5. Honesty of the managers must be reliable and uniform. Any manager that is prone to exaggeration might skew the budget results.

The budgeting process speaks volumes about your business strategy and could make the difference between success and failure of your small business. We advise that you contact your CPA for an independent opinion about your draft , or contact us, for online support.

Return from Zero based budgeting to budgeting.