Zero Based Budgeting

3 Jun 2022  Read 779 Views

Let's Offend:
Don't wanna be rude to your face but aren't you broke by the 10th of every month? Yeah yeah, rent, EMIs, bachho ki padhai, dadi ki dawai, expenses, etc etc. We get it. But if you have nothing left, what are you going to budget?

Ever face problems with budgeting expenses? 

Well, yours truly surely does.  

Budgeting is not everyone’s cup of tea. It takes time, patience, and experience. If budgeting is not right, one might struggle with expenses at the end of the month. That is why it is essential to understand how to budget right and save some money in the process. 

By the way, do you know about zero-based budgeting? 

Let us discuss this in detail.

What is Zero-Based Budgeting?

Zero-based budgeting is a medium of preparing a plan or setting a budget from scratch, i.e., zero value. A zero budget is prepared to manage the system of financial working. There is no limit to preparing this budget. One can prepare it on a weekly, monthly, quarterly, or yearly. 

Large organisations often use this process to manage their expenses.

For preparing this budget, one must analyse every function of the organisation for its need and costs and add the value to the budget accordingly. This budgeting method helps managers manage even minor cost expenses in the company. 

Zero-based budgeting is similar to traditional budgeting, but the only difference is in the base. Traditional budgeting depends on previous year data, while zero-based budgeting does not. 

What is the Process of Zero-based Budgeting?

The process of zero-based budgeting (ZBB) involves a few points to understand its concept deeply. Each organisation follows the same step for ZBB. It is explained in detail below:

  • Step 1: Initial stage 
    It is the first stage of zero-based costing. Here, one prepares the budget from a zero base without considering last year’s data. There is no baseline for preparing the budget. One adds each item with zero value.  

  • Step 2: Evaluate and analyse
    In this step, one must evaluate and analyse the added activity and areas. It will allow the elimination of unnecessary items, making zero-based budgeting cost-effective. 

  • Step 3: Justification
    Identify each area and justify its relevance. It enables the deletion of irrelevant activities from the budget, decreasing the load of the budget.  

  • Step 4:  Check efficiency
    After justification and before implementing the budget, perform each activity to check its efficiency. Do it irrespective of whether this activity is valuable for the organisation. This step further reduces the budget amount budget.  

  • Step 5: Implementation
    It is the part of execution where the prepared budget is implemented and communicated to the workers and employees of an organisation. The budget is narrated to particular employees with their specific roles and responsibility. 

What are the Features of Zero-based Budgeting?

Zero-based budgeting meaning is preparing a budget for a particular year with zero bases. It may have many key features that make it easier to understand. These key features are discussed in detail below:

  • Without base:
    The main feature of ZBB is it is prepared from scratch or has zero bases; one allocates the expenditure for each activity without any base. The budget for each year is fresh and does not repeat past mistakes. 

  • Cost-effective:
    The zero-based budgeting has the feature of being cost-effective. The planner adds each area after evaluating its cost and value in the organisation. So, the budget is less expensive and prepared according to the liquid capacity of the company. 

  • Considers each activity and area:
    The budget planners consider all the activities an organisation performs while preparing a budget. They evaluate each area and, if necessary, add it to the budget. Its focus is on the activities rather than the functional departments. 

  • Based on decision making:
    The organisation prepares the budget after making the funding decision and then adjusts it according to the funds available. Before considering each activity, a decision is made based on funds available and left. 

  • Set priorities: 
    The budgeting team sets the priorities before making a budget. The special funds are for discretionary costs such as advertising, research & development, and training. These costs are an important part of every organisation. 

  • Accountability:
    Zero-based budgeting is prepared to eliminate the flaws of the traditional budgeting system. That is why it starts from zero bases. So, each activity performed in the organisation is responsible for its cost accountability. This feature is also taken into consideration while preparing a budget. 

  • No extra expense added:
    ZBB eliminates all the extra expenses that increase the budget’s value and imbalance it. No additional cost expenses are added from the initial. 

What are the Limitations of Zero-based Budgeting?

Despite the benefits, there are many limitations of zero-based budgeting. 

  • The main limitation of this approach is that it is a time-consuming process. It will take considerable time to evaluate and analyse each activity and area. 

  • Sometimes, the budget will be made on the incorrect assumption and fail. 

  • This process of ZBB requires specialised managers with the knowledge and training to make a budget. So, it will cost more to the company, and it will be an expensive budgeting method. 

  • Preparing the budget entails paper wastage because the whole process is paperwork-based. 

  • While an organisation may plan most expenditures in the budget, some unplanned ones may make it difficult to adjust them. 

Conclusion

Zero-based budgeting is the best method to know the expenses incurred in the future. Many organisations widely use it. It reflects the true picture of the organisation. 

Under zero-based budgeting, all the activities are first evaluated and then added to the budget. It is the top-down approach to budgeting. Although it is time-consuming, it is a comprehensive approach with many benefits.  

About the Author: Rishika Mukherjee | 239 Post(s)

Mukherjee is an avid reader and loves to write as much as read. As Hazel Grace stated, she could read a good author's grocery list, and so would Miss Mukherjee. 

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