ZBB — Zero — Based Budgeting

Содержание
  1. What is Zero Based Budgeting / ZBB? Definiton, advantages
  2. What is Zero Based Budgeting (ZBB)?
  3. Zero Based Budgeting requirements
  4. Application of ZBB
  5. Zero Based Budgeting advantages
  6. Disadvantages
  7. Time consuming
  8. Requires manpower
  9. Requires knowledge
  10. Awareness for details
  11. Uniform
  12. It’s Your Turn
  13. What Is Zero-Based Budgeting, and How Can it Help Small Businesses?
  14. What is a budget?
  15. What is zero-based budgeting?
  16. Zero-based budgeting process
  17. When to use zero-based budgeting
  18. Zero-based budgeting vs. traditional budgeting
  19. How can zero-based budgeting help small businesses?
  20. Zero-based budgeting example
  21. Zero-Based Budgeting Explained: How it Works, Creating a Budget, and App Alternatives
  22. What is a zero-based budget?
  23. How to make a zero-based budget
  24. 1. Start with your income
  25. 2. Track and categorize your expenses
  26. 3. Subtract your expenses from your income
  27. 4. Keep track of your budget and adjust as needed
  28. An example of a zero-based budget
  29. Does zero-based budgeting work with an irregular income?
  30. Zero-based budgeting apps
  31. Does zero-based budgeting work?
  32. The pros
  33. The cons
  34. Should you start a zero-based budget?
  35. Advantages and Disadvantages of Zero Based Budgeting
  36. Zero Based Budgeting – Meaning
  37. Emphasize on Decision Making
  38. Orientation towards Cost-benefit Analysis
  39. Efficiency in resource allocation
  40. Improvement for next period
  41. Discontinuation of an obsolete process
  42. Changes with the change in an organization
  43. Subjective in nature
  44. Detrimental to the long-term goals
  45. Rigidity
  46. Skills and managerial conflicts
  47. Zero-based Budgeting — Overview and Guide to Zero-based Budgeting
  48. Zero-Based Budgeting vs Traditional Budgeting
  49. Advantages of Zero-based Budgeting
  50. Disadvantages of Zero-based Budgeting
  51. Final Thoughts
  52. Related Articles
  53. Zero based budgeting
  54. Zero based budget as managerial tool
  55. Accuracy in Zero based budgeting
  56. Stages involved in Zero based budgeting
  57. Advantages of Zero based budgeting
  58. Disadvantages of Zero based budgeting
  59. Zero Based Budgeting | Examples of Zero Based Budgeting
  60. Steps in Zero Based Budgeting
  61. Examples of Zero Based Budgeting
  62. Advantages
  63. Conclusion
  64. Recommended Articles

What is Zero Based Budgeting / ZBB? Definiton, advantages

ZBB - Zero - Based Budgeting

This article explains Zero Based Budgeting (ZBB) in a practical way. After reading you will understand the basics of this powerful financial management tool.

What is Zero Based Budgeting (ZBB)?

Zero Based Budgeting is a reverse approach of traditional planning and decision making with respect to budgeting.

In traditional budgeting, managers begin by reviewing the budget of the previous year and make corrections (in revenue and expenditures) performance expectations. The budget of the previous year is consequently considered to be the baseline (starting point).

In Zero Based Budgeting all managers are required to justify all budgeted expenses, not just the changes in the budget of the previous year. The baseline in Zero Based Budgeting is not last year’s budget but “zero”.

Zero Based Budgeting requirements

This financial management approach requires much documentation and justification.

In addition to the total budget, the manager responsible must identify all expected expenditures and rank all of the activities according to their relevant importance and costs.

The persons ultimately responsible (high-level managers) can make decisions about investments and budget cuts that can be justified at all times their supporting information and no immediate pre-financing as is the case in the traditional manner of budgeting.

Application of ZBB

This type of budgeting usually occurs in the government and non-profit sectors. The philosophy behind ZBB is good. However, it should be noted that ZBB requires frequent reviews.

In ZBB reviews are carried every year on account of the fact that it is a time-consuming and costly process.

Interim reviews can be carried out but that is the organization’s choice with respect to time and priority.

Zero Based Budgeting advantages

ZBB has the following advantages:

  1. Efficient allocation of resources, as it is needs and benefits.
  2. This approach drives managers to find cost-effective ways to improve activities.
  3. This approach detects inflated budgets.
  4. It is useful for service departments because criteria are not always easy to identify.
  5. It increases staff motivation because it gives them more initiative and responsibility in the decision-making process.
  6. This approach increases the communication and coordination within the organization about certain decisions.
  7. This approach identifies and eliminates wastage and out-of-date operations.
  8. This approach identifies opportunities for outsourcing.
  9. This approach forces cost centres to link their mission to the related organizational objectives.

Disadvantages

There are also disadvantages to the application of ZBB:

Time consuming

Sometimes the necessary expenditures are hard to define for managers as a result of which it becomes too time-consuming and exhaustive a process to arrive at a solid foundation with respect to the decision-making about the investment.

Requires manpower

This approach forces staff (especially managers) to justify every detail related to the expenditures. For instance, because the R&D department cannot completely underpin their intended innovation, this could have advantages for the budgeting of another department because they are able to justify their expenditures in great detail.

Requires knowledge

In order to apply this approach appropriately, it is necessary to train managers well. For ZBB to be successfully implemented, managers at all levels of the organization must understand how zero based budgeting works in the organization as they are ultimately responsible for the management, decision-making and the communication of entire process.

Awareness for details

As the volume of the required data and forms is very large in zero based budgeting, no one is capable of knowing every detail of its content and decisions. There is a risk to compressing information and details because this might remove critically important data. This is a large risk.

Uniform

Honesty and consistency of the managers must be reliable and uniform. Any manager that exaggerates affects the results negatively.

It’s Your Turn

What do you think? Is the Zero Based Budgeting costing method applicable in today’s modern companies? Do you recognize the practical explanation or do you have more suggestions? What are your success factors for a good Zero Based Budgeting costing set up?

Share your experience and knowledge in the comments box below.

If you d this article, then please subscribe to our Free Newsletter for the latest posts on models and methods. You can also find us on , LinkedIn, and .

More information

  1. GFOA. (2011). Zero-Base Budgeting Modern Experiences and Current Perspectives. Government Finance Officers Association (GFOA) Research and Consulting Center. Chicago.
  2. Kong, D. (2005). Performance-based budgeting: the US experience. Public Organization Review, 5(2), 91-107.
  3. Pyhrr, P. A. (1973). Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses. Wiley.
  4. Schick, A. (1978). The road from Zero Based Budgeting. Public Administration Review, 38(2), 177-180.
  5. Wholey, J. S. (1978). Zero base Budgeting and Programme Evaluation. Rowman and Littlefield.

How to cite this article:
Van Vliet, V. (2010). Zero Based Budgeting (ZBB). Retrieved [insert date] from ToolsHero: https://www.toolshero.com/financial-management/zero-based-budgeting-zzb/

Add a link to this page on your website:
ToolsHero.com: Zero Based Budgeting (ZBB)

Источник: https://www.toolshero.com/financial-management/zero-based-budgeting-zzb/

What Is Zero-Based Budgeting, and How Can it Help Small Businesses?

ZBB - Zero - Based Budgeting

To stay on top of your business expenses, you need to constantly plan and update your small business budget. When you make a traditional budget, you use the previous budget and tweak it. This might not be the most effective way to make a budget, especially for small companies. Another option is zero-based budgeting. What is zero-based budgeting?

What is a budget?

Before learning about zero-based budgeting, it’s important to understand the different parts of a typical business budget. Here are three things a budget needs to do:

  1. Project revenue: How much will you earn?
  2. Determine expenses: How much will you spend?
  3. Predict profits: How much will you have after expenses?

What is zero-based budgeting?

Zero-based budgeting (ZBB) is an approach to making a budget from scratch. The budget is not previous budgets. Instead, the budget starts at zero.

With zero-based budgeting, you need to justify every expense before adding it to the official budget. The goal of zero-based budgeting is to reduce spending by looking at where costs can be cut.

Your employees might be involved in creating a zero-based budget. You can ask employees what kind of expenses they will have and figure out where you can reduce business expenses. If an expense does not benefit the business, or if it can be done in-house, it is axed from the budget.

Zero-based budgeting process

There are a few different steps in zero-based budgeting to keep in mind. The process of zero-based budgeting follows the same basic steps:

  1. Identify business goals
  2. Develop and analyze new ways to achieve goals
  3. Discover new ways to fund business processes
  4. Prioritize funds

By following these zero-based budgeting steps, you will determine what expenses go toward achieving business goals that directly benefit your company. Then, you can find new ways to spend.

With ZBB, you might find that your budget fluctuates significantly between periods. You might have a budget of $50,000 one year and $35,000 the next, since budgets aren’t previous ones.

When to use zero-based budgeting

As a small business owner, you’re busy. You might not have time to make a budget from scratch every few months or even each year.

Some companies might benefit from creating a zero-based budget once every few years and using a traditional budget in the meantime.

Zero-based budgeting vs. traditional budgeting

Un traditional budgeting, zero-based budgeting does not look at budgets made in prior years. Traditional budgeting looks at prior-year budgets and adjusts the information in those budgets. For example, if you hire one new employee, you would increase your budget since you would add new wages to your payroll expenses.

Zero-based budgeting is more time-consuming than the traditional approach because you need to start from scratch and strategize where your expenses can be cut. You need to know where every dollar is going to implement zero-based budgeting.

Both zero-based and traditional budgeting are important in creating departmental budgets. If you have managers of different departments, you might allocate funds to them for the year.

With traditional budgeting, managers are encouraged to spend their allowance so they don’t lose it.

Zero-based budgeting is a little more frugal, and you might not see unnecessary spending, since every expense is accounted for.

How can zero-based budgeting help small businesses?

Zero-based budgeting is a great way to improve and manage your small business budget. It can help you:

Create your first budget: Zero-based budgeting is necessary if you are a startup. Startups do not have previous budgets to look at, so you would need to start from scratch. This gives you the chance to really plan your budget and shop around for the most inexpensive vendor.

Save money: Zero-based budgeting can help you save money and improve your profits for the year. By analyzing where unnecessary business expenses are coming from, you can eliminate them. Instead of doling out cash for the same things that have no benefit to your business, you can strategize how to effectively spend money.

Know where money is going: If you give managers a budget, you want to know where the money is going. Managers must write a description of how much money they need and what they will use it for.

Zero-based budgeting example

Let’s say you run a hair salon and sell shampoo and conditioner to customers. Last year, you purchased these products from another company for $30,000.

You decide to use zero-based budgeting for the upcoming year. As you’re listing expenses, you realize you can make your own hair products for cheaper than the supplier’s price. Making your own products will save you $22,000.

When creating your zero-based budget, you would only mark $8,000 ($30,000 – $22,000) as the expense budget for the beauty products.

You also realize that you can cut back on advertisements. Instead of spending $10,000 in this example of zero-based budgeting, you only need to spend $3,000. You would mark $3,000 for advertisements.

And, you find out you can get a better rate from a different office supplier, saving you $500. Instead of $1,500, your supplies will now only cost you $1,000.

If you had based your upcoming budget on a previous year’s budget, you might not have realized the different expenses you could cut back on. But with zero-based budgeting, you make sure that every dollar is accounted for.

Want to know if you’re sticking to your budget? You need a way to keep track of the money coming into and going your business. Patriot’s online accounting software lets you easily track income and expenses, so you can make adjustments to your budget. Try it for free today!

This is not intended as legal advice; for more information, please click here.

Источник: https://www.patriotsoftware.com/blog/accounting/what-is-zero-based-budgeting-example-process/

Zero-Based Budgeting Explained: How it Works, Creating a Budget, and App Alternatives

ZBB - Zero - Based Budgeting

Zero-based budgeting is a customizable and flexible budget that’s incredibly effective for paying down debt and reaching savings goals.

It works so well because zero-based budgeting forces you to pay attention to every dollar that flows in and your budget. And when you know exactly where your money is going, you are in control.

What is a zero-based budget?

Zero-based budgeting is taking your income and allocating it to each of your expenses, your savings, and debt payments until you reach zero. You are making use of every single penny you earn. And while it’s strict in the sense that you have to distribute your money all the way down to zero, you get to decide exactly where all of those dollars go.

Besides being very hands-on, the real benefit of zero-based budgeting is that you make things savings and debt payments a priority by creating a line for them in your budget. You’re not waiting until the end of the month to see if you have enough extra funds for them.

And, zero-based budgeting will show you where you need to make adjustments to your budget so that you have the funds for all of your money goals.

Sometimes you’ll hear zero-based budgeting referred to as zero-sum budgeting or abbreviated to ZBB.

Related: 50/30/20 Budgeting Rule: What It Is and How It Works

How to make a zero-based budget

To build your own zero-based budget, you need to start with a full understanding of your income and expenses. A guess isn’t realistic enough to create an effective budget, so grab your paycheck stubs, bank and credit card statements, receipts, etc.

1. Start with your income

This should include your monthly paycheck(s), side hustle income, rental income, benefits, child support, etc. If money is coming in, count it as income.

2. Track and categorize your expenses

If you’re new to budgeting and don’t know what you’re spending money on and how much, start tracking your spending. Write everything down, put it in a spreadsheet, use an app, whatever you need to do.

Your expenses should include:

  • Mortgage/rent
  • Utilities
  • Insurance
  • Transportation
  • Debt payments
  • Savings
  • Investments
  • Entertainment
  • Cell phone
  • Extras

For seasonal expenses, a holiday or back-to-school shopping, add those into your budget and think about when you need to start saving for them. When it comes to writing out your budget, it may help to label these as “funds” so you can save up money for those expenses.

If your income fluctuates from month to month, it would be advantageous to categorize your expenses by importance. I’ll explain more about this a little further down.

3. Subtract your expenses from your income

Take your total income and subtract every expense until you get down to zero.

4. Keep track of your budget and adjust as needed

Having a functional zero-based budget depends on you using it every month and making adjustments as needed. It’s 100% okay to move money from one spending category to another.

As you do things pay off your debt, you’ll want to adjust your budget and allocate that money to something else.

An example of a zero-based budget

Here’s an example of what a zero-based budget looks . Remember, we start with income and subtract expenses down to zero.

Monthly income: $9,000 (This is the combined total of everything coming into your household).

Income – Expenses

  • Start with $9,000
  • – $1,500 for housing expenses (mortgage, insurance, taxes, utilities, phone/internet)
  • – $600 healthcare costs
  • – $500 transportation
  • – $600 food
  • – $1,000 childcare
  • – $100 entertainment
  • – $3,000 debt
  • – $1,700 savings/retirement
  • = $0

Does zero-based budgeting work with an irregular income?

Yes, zero-based budgeting can work if you have an irregular income! The way you work it is by listing your income as the lowest possible amount you could make in a month. Then, start subtracting your most important expenses (food, shelter, transportation).

When your income starts to go up for the month, subtract the rest of your bills and debt payments. If you still have more coming in, that goes towards everything else.

The goal is to take care of your most important expenses first. If you’re self-employed or a freelancer earning an irregular income, then you’re probably used to spending this way already, even if you aren’t using a zero-based budget.

Zero-based budgeting apps

If using a pen and paper to budget sounds too tedious, there are a couple of great zero-based budgeting apps to make it even easier:

  • YNAB (You Need A Budget)- This app works on the premise of giving every dollar a job. It’s an M$M reader favorite, and it comes with a 34-day free trial.
  • EveryDollar Built by Dave Ramsey’s team, EveryDollar has both a free and paid zero-based budgeting app option.
  • Spreadsheets- Whether you Google Sheets or Excel, there are plenty of free templates or you can learn how to make your own zero-based budget template.

M$M tip: We put YNAB and EveryDollar up against one of the most popular budgeting apps today, Mint. Check out these articles to see how they stack up Mint vs. YNAB: Which Budgeting App is Best? and EveryDollar vs. Mint: Which Budgeting App is Best?

Does zero-based budgeting work?

Yes! It’s incredibly effective for people who want to pay off debt or reach savings goals. If you’ve ever heard Dave Ramsey fans go on about how amazing his debt pay off strategy is, it’s because they are using zero-based budgeting.

Zero-based budgeting works so well because it forces you to think about every single dollar you are spending. You end up taking complete control of your money and where it’s going.

You can easily see if you are earning enough to make your financial plans happen, you can move money around from different categories, etc. This flexibility is part of what makes it so effective.

The pros

Zero-based budgeting forces you to take a hands-on approach to your money so you know exactly what’s coming in and going out. People who use this system are quick to see where they need to adjust their budgets, earn more money, and cut back on spending.

Zero-based budgeting is fully customizable. You end up with a budget that fits your exact financial situation. You factor in your financial goals so you can spend and save in a way that works for you.

The cons

It’s time-consuming because you have to track every single expense. Really, a good budget will take time to build and implement, but the investment is worth it. You’ll find that after a couple of months it gets more efficient and turns into an easy routine.

It’s slightly more difficult if you have an irregular income. Even though it can be done, zero-based budgeting with a fluctuating income takes a little work. One thing that can help is having a healthy emergency fund so that you can make your budget work even during the months when you aren’t earning as much.

Should you start a zero-based budget?

If you are looking for a great way to take complete control of your money, then yes, give zero-based budgeting a try. With any budget you try, be patient and give it a few months before you throw in the towel.

Creating and sticking to a budget isn’t easy work for a lot of people. In fact, the number of people who actually stick to a budget continues to drop.

It’s not going to be perfect at first, but when you give yourself the space to create a zero-based budget and implement it, it might just change your financial life.

Источник: https://millennialmoneyman.com/zero-based-budeting/

Advantages and Disadvantages of Zero Based Budgeting

ZBB - Zero - Based Budgeting

Zero Based Budgeting is a method of budgeting wherein no base is considered for any budget. Having learned Zero Based Budgeting in past, we shall, in this article discuss the Advantages and Disadvantages of Zero Based Budgeting.

Zero Based Budgeting – Meaning

As the name indicates, zero-based budgeting is a budgeting method in which there is a zero base consideration while preparing the budget. It justifies all the expenses each time, we prepare a new budget. Zero-based budgeting does not aim to consider any base.

Each expense has to be drilled down and analyzed well before the actual allocation of the budget. It is known as need analysis. The preparation of the budget is on the basis of actual need of the expenses for the forecasted period.

 It does not consider the fact that the previous budget was lower or higher than the current budget.

Zero-based budgeting targets to identify efficient and alternative methods for the organizations who opt for optimum utilization of resources. This will not only ensure efficiency and effectiveness but also wealth and profitability.

Any process will have advantages and disadvantages. However, we can call a process to be a feasible one only when its advantages exceed its disadvantages.

Emphasize on Decision Making

Traditional budgeting considers the fact that “how much” expense shall be incurred. However, zero-based budgeting is on “why” approach. It goes to the root of the expense. Zero-based budgeting aims towards achieving the objectives of the organization. For better decisions, Zero-based budgeting completely ignores the past years’ figures.

Orientation towards Cost-benefit Analysis

Zero-based budgeting aims at cost-benefit analysis. It does not focus on studying the changes in expenses and preparing a variance analysis (such as why the expenses increased or reduced).

However, it considers the necessity of the expense and the benefit which will be derived from the expense. In order to prepare an effective zero-based budget, more and accurate information is a must. Zero-based budgeting operates vertically as well as horizontally.

And hence it enables all the levels of management to participate in the decision-making process of the organization.

Efficiency in resource allocation

The ultimate objective of any organization is to maximize the profitability of the organization and enhancing the wealth of the shareholders. The zero-based budget helps in achieving this objective. Zero-based budgeting ensures that the resources of the organizations are economically and efficiently allocated.

Improvement for next period

For each year, the preparation of the zero-based budgeting is with the same assumption of not taking a base for any previous period. Each department of the organization analyzes the expenses every year. They make sure that there is an inclusion of only those expenses in ZBB which are necessary and which derive benefits.

Discontinuation of an obsolete process

At first, the zero-based budget identifies all the obsolete processes of the manufacturing unit or other departments of the organization.

If the process is not essential for the organization, the same has to be analyzed and scrapped by the management. Discontinuation of obsolete operation results in better costing, better pricing and better profitability of the organization.

Zero-based budgeting helps in enhancing the interpretation and knowledge of different cost patterns.

Changes with the change in an organization

Due to technological changes, with the new and advanced processes, the underlying assumptions and expenses have to be changed. Hence, zero-based budgeting responds to the changes in the organization.

Subjective in nature

Some of the expenses in the organization are difficult to judge whether the same is essential or not. The reason is the benefits are qualitative in nature and one cannot measure it in numbers.

Well, the organization can overcome this disadvantage by a thorough analysis of the expenses and with the help of management consultants.

Detrimental to the long-term goals

Zero-based budgeting is a cost and benefit analysis of a particular period. In the short run, the company may not get benefit in the same year of incurring the expenses. However, some of the expenses which have to be incurred for achieving the long-term goals of the organization.

The top management shall make a list of all the expense which has long-term benefits and exclude the same while preparing the budget.

Rigidity

The organization should not always stick to the budget in every situation. Sometimes circumstances may arise which lead the management to incur the expense of the unexpected opportunity or to mitigate the possible threat.

The company can make a provision of the same in zero-based budgeting and overcome the same.

Skills and managerial conflicts

Management conflicts may arise since the zero-based budgeting requires a large amount of time and efforts of the managerial and executive staff. Sometimes, the required skills are also not present in the staff for preparation of zero-based budgets.

The management shall make proper planning and involvement of qualified and experienced staff to participate in the zero-based budgeting process.1–3

Last updated on : January 5th, 2019

Источник: https://efinancemanagement.com/budgeting/zero-based/advantages-and-disadvantages-of-zero-based-budgeting

Zero-based Budgeting — Overview and Guide to Zero-based Budgeting

ZBB - Zero - Based Budgeting

Zero-based budgeting (ZBB) is a budgeting technique that allocates funding efficiency and necessity rather than on budget historyFiscal Year (FY)A fiscal year (FY) is a 12 month or 52 week period of time used by governments and businesses for accounting purposes to formulate annual financial reports.

A Fiscal Year (FY) does not necessarily follow the calendar year. It may be a period such as October 1, 2009 – September 30, 2010..

Management starts from scratch and develops a budget that only includes operations and expenses essential to running the business; there are no expenses that are automatically added to the budget.

All expenses must be justified in order to qualify to be placed in the budget.

For example, if a company expects to incur $100,000 in salaries and wages expenses, and believes that the full $100,000 is absolutely necessary to operate the business smoothly, then it will be included in the budget – however, each individual allotment of salary/wages has to be examined and justified in order to be included.

If, instead of paying some salaries, the company’s management determines that it can substitute technology at a lower cost, then adjustments to the budget are made accordingly.

To learn more, check out our budgeting and forecasting course now!

Zero-Based Budgeting vs Traditional Budgeting

All businesses use budgets to keep track of expenses and improve ways to minimize costs and maximize profit. Budget planning for the current/next year is usually budgets from previous years.

In fact, traditional budgeting begins with the previous year’s budget and usually implements incremental percentage increases or decreases to meet new goals.

These percentages usually range anywhere from 1% to 10%.

Sometimes, budgets can get control, or in some years may show significantly higher or lower costs, depending on the overall market outlook and other external factors.

In these scenarios, it does not make sense to simply look at last year’s budget, because significant changes in the company’s situation have taken place.

The entire budget needs to be redone from scratch – hence, a zero-based budget.

In a zero-based budget, the company analyzes every expense/aspect of the business one by one. This is referred to as starting from a “zero base.” While zero-based budgeting examines all expenses, traditional budgeting only examines proposed new expenses.

Advantages of Zero-based Budgeting

  • The final output is well justified and is aligned with the company’s overall business strategy or business plan.
  • Encourages more collaboration throughout the company
  • Improves performance and operating efficiency by challenging assumptions and examining expenditures
  • By avoiding traditional budgeting percentage increases, there is a significantly better chance of being able to make cost reductions.

Disadvantages of Zero-based Budgeting

  • Implementing a zero-based budget requires qualified personnel and specialized training, which can be time-consuming and costly.
  • May harm the company’s overall culture or brand image
  • Might be cost-prohibitive (because of time, research, and analysis required) for companies with minimal available funding
  • It is substantially more complex and tedious to start from a zero base. Traditional budgeting is much simpler, faster, and easier to implement.

Final Thoughts

To sum up, although zero-based budgeting is an option that can create numerous benefits, there are also some potential drawbacks.

Implementing zero-based budgeting is not solely an accounting decision and must be considered in conjunction with the company’s overall business strategy and goals. While a zero-based budget may help companies better reduce costs, they may completely change the value of the company and its culture.

For example, if companies rely heavily on maintaining a positive, vibrant, and accessible environment for its employees but all the expenses to maintain this environment were eliminated due to the zero-based budget process, then the overall culture of the company may change. This change may lead to higher turnover rates and negative changes in brand perception.

According to a study by Accenture, only about 50% of companies can sustain cost savings for more than one to two years, and in such cases, traditional budgeting becomes ineffective.

Zero-based budgeting must be a collaborative, unanimous decision within the company after careful consideration of all its relative advantages and disadvantages.

To learn more, check out our budgeting and forecasting course now!

Thank you for reading CFI’s guide to zero-based budgeting.

CFI offers the Certified Banking & Credit Analyst (CBCA)™CBCA™ CertificationThe Certified Banking & Credit Analyst (CBCA)™ accreditation is a global standard for credit analysts that covers finance, accounting, credit analysis, cash flow analysis, covenant modeling, loan repayments, and more. certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

  • Budget HeadBudget HeadThe person who is ultimately responsible for the framing and creation of the Budget for a project is known as the Budget Head for that project. The Budget itself is a document that lists the expected revenues and expenditures associated with a project.
  • Budget HolderBudget HolderThe person who is ultimately responsible for ensuring that the budget is followed is known as the Budget Holder. Budget holders are usually the managers and operational directors of companies who are tasked by the owners/shareholders or the board of directors to ensure that the company follows its budget
  • Projecting Balance Sheet Line ItemsProjecting Balance Sheet Line ItemsProjecting balance sheet line items involves analyzing working capital, PP&E, debt share capital and net income. This guide breaks down how to calculate
  • What is Financial Modeling?What is Financial ModelingFinancial modeling is performed in Excel to forecast a company's financial performance. Overview of what is financial modeling, how & why to build a model.

Источник: https://corporatefinanceinstitute.com/resources/knowledge/accounting/zero-based-budgeting/

Zero based budgeting

ZBB - Zero - Based Budgeting

Zero based budgeting is used as a managerial tool to control the costs. It got popularity since the early 1970’s. The ZBB was developed by Peter A. Pyhrr. He defines,

“Zero based budgeting is a planning and budgeting process which requires each manager to justify his entire budget request in detail from scratch (hence zero base) and shifts the burden of proof to each manager to justify why he should spend any money at all. The approach requires that all activities be analyzed in decision packages which are evaluated by systematic analysis and ranked in order of importance”.

Zero based budget as managerial tool

Most of the businessmen were accepted that the zero based budget can be used as a managerial tool. The reason is that zero based budgets are integrating the managerial functions of planning and control.

Even though, no businessman can introduce ZBB in their business concern.

But, Ex-President Jimmy Carter of the United States of America, then Governor of the States of Georgia, introduce ZBB as a means of controlling state expenditure.

A budget is nothing but the expression of objectives of an organization in numerical terms. A budget can be effectively used as a managerial control if input of an activity has a direct relation with the output of these activities.

For example, quality raw materials are supplied to production department certainly the output of such production department has quality. But there are some activities that have no direct relationship with other activities. In other words, the input has no relationship with output.

Even though, a direct relationship can be created with the help of ZBB viz., the output of legal staff and office personnel.

Generally, high level of educated persons in legal matters must be appointed as legal staff. If so, the organization can get success. At the same time, by appointing an ordinary educated person in legal matters, an organization can get success through zero based budgeting. The reason is that ZBB develops and use standard cost for such activities.

Accuracy in Zero based budgeting

A budget is prepared by taking previous year budget as base. This type of approach is followed by many business concerns.

Moreover, the ly changes of current year are also considered over and above the past experience while preparing a budget.

If the previous year’s budget has any draw back or error that has not been find out by any body so far, it is very difficult to prepare an accurate budget for in the years to come. These things are overcome in the zero lose budgeting.

Stages involved in Zero based budgeting

The following steps are involved in the preparation of ZBB

1. Each separate activity of an organization is identified and designated as a decision package.

2. The management can evaluate such a decision package and rank it against other activities of an organization.

3. The management can decide whether the decision package is to be approved or not.

4. If a decision package is approved, it should be analyzed as the extent of achieving goals of an organization.

5. The management can identify the cost of minimum efforts required to sustain each decision package.

6. Alternatives for each decision package are considered in order to select better and cheaper options for the package.

7. Manager ranks the decision packages in order of priority for resource allocation.

8. Resources are allocated to the packages.

Advantages of Zero based budgeting

The following are the advantages of ZBB.

1. It is highly useful to non-profit or service organizations.

2. Costs may be saved in inefficient operations.

3. Since the resources are allocated on cost benefit terms, there is a better utilization of resources.

4. It forces the management executives at all levels for active participation in budgeting process.

5. It ensures careful planning.

6. The finance manger gives a clear picture about the extent of finance available and the consequences of raising the finance.

7. It does not carry any inefficiency and forward the same to next year.

8. It promotes operational efficiency since it is not incremental approach.

Generally, the zero based budgeting try to overcome the weaknesses of conventional budgeting.

Disadvantages of Zero based budgeting

The following are the disadvantages of ZBB.

1. In the case of large-scale business organization, a number of decision packages are prepared and it involves more expenses.

2. It is a time consuming process.

3. More paper work is involved in the preparation of ZBB.

4. Managers can be threatened by zero based budgeting.

5. The manager may develop fear and oppose new ideas and changes.

6. There is personal bias in the ranking of decision packages.

7. Administration and communication of ZBB may create many critical problems.

Источник: https://accountlearning.com/zero-based-budgeting-stages-advantages-disadvantages/

Zero Based Budgeting | Examples of Zero Based Budgeting

ZBB - Zero - Based Budgeting

Zero-based budgeting (ZBB) is a way of budgeting in which the budget is prepared in alignment with the organization’s strategies and goals. In ZBB the exercise starts from zero base (i.e.) all the elements of budgeting must be justified for every period of budgeting. It is basically made from scratch.

A proper analysis needs to be done in fixing the budget value for every element expense, cost, revenue, etc. for every year in Zero based budgeting. This budget is not the traditional budgeting where the current budget is drawn from the previous period budget (i.e.) increase or decrease from the previous budget. (E.g.

) In the current budget, 2% increase is considered in Administrative expenses from the previous budget.

ZBB is a time-consuming process as it involves a bigger process than the traditional cost-based budgeting.

It drives the budget right from identifying the cost drivers, understanding and analyzing the previous year expenses and framing the value for recurring expenses, the justification for the new expenses, etc.

In this method of budgeting, Cost optimization is possible as it starts from zero base instead of allocating an increase and decrease from the previous budgets.

In ZBB the funds are allocated to expenses according to the necessities, and requirements which drive business efficiency and performance. It prioritizes the justified expenses in budgeting rather than following the prior period budgeting trends.

It is more of a strategic budget as it allocates the fund after complete analysis and reasoning of expenses. Detailed documentation and explanation are required for approval of the budget by the managerial personnel.

ZBB brings discipline in the organization system in terms of spending and management which in turn leads to improved tracking and performance.

Steps in Zero Based Budgeting

The following are the steps in zero based budgeting are:

  • Start from scratch (ZERO BASE).
  • Identification of business target and requirements in terms of budgeting.
  • Forming the route map and methods to accomplish the target along with proper justification for all components of the budget.
  • Assessing the methods identified and to look for alternative methods to achieve the business targets. Standardize the process and setting up goals.
  • Finalizing the budget numbers and roll out the budget plan and make sure it is clearly communicated to the respective functions.

Examples of Zero Based Budgeting

Zen Corp is the manufacturers of various car models. A major part of the car making is procured externally and the price of the same is on increasing trend year on year.

Considering the zero-based budgeting model the company looks out for other alternatives for that major part whether the company can afford to manufacture that major part on its own, does it have all the facilities, and also does the cost benefit analysis, thus in turn starts the estimation from scratch and finally arrive at the conclusion.

X space Inc. is a book selling company that is growing in the e-commerce space which previously had traditional outlets for selling the books.

In the current year it has completely migrated to the e-commerce business. Now the company is planning to do ZBB as there is a complete shift in the way of operations.

So, some key expenses they look into is renting expense, advertisement cost, staff cost, etc.

  1. Rent expense in prior period is $1,000 per month per outlet. They had totally 10 outlets in the city which comes to $10,000/ month. Now with the present set up they hardly require 2 offices set up for which they used two of their outlets. So, there is a cost savings to the extent of $8,000 per month.
  2. On the other end, the e-commerce business is challenging with a lot of emerging players. So, they decided to spend a good amount on advertisement in order to attract customers. In the previous period, they had spent only $10,000 totally for the advertisement in that year, but now considering the situation they have increased it to $50,000.

As mentioned above, ZBB looks into every element of budgeting and starts from scratch in order to find the right amount for the right expense without the influence of prior period budgets.

Advantages

ZBB is an accurate method of budgeting as the budget is made from zero base with proper analysis. Each element of cost in budgeting is considered after collecting the right data.

  • It is made the present needs and requirements instead of drawings no’s from the previous period. It is an efficient way to do budgeting and proper targets can also be set.
  • It involves analyzing the previous period expenditure and takes into consideration the current requirements, so it helps to reduce the unwanted expenses. It leads to cost optimization and looks for possible savings.
  • This budgeting requires collective efforts from all the teams, and departments in the organization, so, it helps in better co-ordination and transparency in the system.
  • In ZBB all elements of the budget must be accepted, and it is un the old-style of incremental budgeting.
  • Costs are justified and funds are allocated in line with the targets set. All allocations are done by activities and functions of performance.
  • The orientation of cost allocation and expenses with respect to the organization’s goals, vision, and mission.

Conclusion

Zero-based budgeting tries to arrive at the right expenses required to be incurred by the organization needs and requirements.ZBB can bring cost optimization, and it is bringing significance to the budgeting exercise.

It helps in setting up right targets which can lead to improved business performance and operating efficiency. Though ZBB is a time-consuming exercise it is the most right and appropriate way of budget preparation.

It also brings accountability and brings a sense of ownership in the system across all functional teams.

In ZBB all budget amounts need to be justified and it needs to be approved. The purpose of ZBB is to look out for opportunities and improve efficiency in budgeting and to reduce unnecessary expenses and costs.

It is the concept of right spending for the right activities. It in turn leads to better utilization of the organization’s funds to the important activities which could bring desired results to the organization.

It is a forward-looking way of budgeting.

This is a guide to Zero Based Budgeting. Here we also discuss the introduction and steps in zero based budgeting along with advantages and disadvantages. You may also have a look at the following articles to learn more –

Источник: https://www.educba.com/zero-based-budgeting/

Все термины
Добавить комментарий

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: