Use this structured process to create a culture of cost management within your business.
In recent years zero-based budgeting appeared to experience a renaissance, as cash-strapped businesses had to justify every penny of their spending.
While the UK economy continues to be volatile, it's vital that smaller businesses cut unnecessary expenditure while trying to grow at pace.
Sustained use of zero-based budgets could help to enforce a culture of cost management.
Isn't it time you examined whether it can benefit your business?
What is zero-based budgeting?
Zero-based budgeting means budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending.
By starting from a 'zero base' at the beginning of each budget, you can create a really effective process for analysing and deciding where to allocate your funds.
It is essentially a way of improving return on investment (ROI) across your business.
Who developed it?
Peter A. Pyhrr developed the idea of zero-based budgeting in 1969 while he was an account manager at Texas Instruments in the US.
In 1977, he wrote his seminal book on the subject, 'Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses'.
Jimmy Carter, then Governor of Georgia, was the first to adopt the process of zero-based budgeting within government when preparing the fiscal 1973 budget.
Advantages of zero-based budgeting
Here are some common advantages of zero-based budgeting.
- Helps a business assess whether each of its departments is appropriately funded
- Allows management to focus on current numbers rather than the figures within previous budgets
- Can remove needless spending
- Can enable better communication within departments by involving employees in decision-making and budget priorities
Disadvantages of zero-based budgeting
Unfortunately, zero-based budgeting doesn't guarantee you'll make savings, as the trick is in how you execute it.
Moreover, the process can be complex and there may be opposition from managers who fear their budgets are under threat and who don't relish having to justify their spending.
That's why clear communication, and making sure you involve staff at all levels of the business, can help the process to work more effectively.
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FAQs
As an accounting practice, zero-based budgeting offers a number of advantages, including focused operations, lower costs, budget flexibility, and strategic execution. When managers think about how each dollar is spent, the highest revenue-generating operations come into greater focus.
What is zero-based budgeting answer? ›
Zero-based budgeting (ZBB) is a budgeting technique in which all expenses must be justified for a new period or year starting from zero, versus starting with the previous budget and adjusting it as needed.
What is a zero-based budget in your own words? ›
Zero-based budgeting is when your income minus your expenses equals zero. Perfect name, right? So, if you make $5,000 a month, everything you give, save or spend should add up to $5,000. Every dollar that comes in has a purpose, a job, a goal.
What is the 60 percent solution? ›
If your committed expenses exceed 60% of your income, you might need to start looking for places to cut back. Jenkins stresses that 60% isn't the magic number, but it's a round number that's easy to remember, and it works for him. You can adjust the percentage to work for you and your financial goals.
What are the criticism of zero-based budgeting? ›
It's Resource Intensive
It takes a lot more time and effort to closely review and justify every budget element rather than modify an existing budget and review only new elements. Some critics argue that the benefits of zero-based budgeting don't justify its time cost because of this.
What are two cons of a zero-based budget? ›
Cons of Zero-Based Budgeting
- Though you can implement repeatable processes with ZBB, it will most likely be more time-consuming than traditional budgeting.
- You're also faced with getting other departments to cooperate, and they might not be able to adequately measure their needs for the entire year.
5 budgeting methods to consider
| Budgeting method | Best for… |
|---|
| 1. The zero-based budget | Tracking consistent income and expenses |
| 2. The pay-yourself-first budget | Prioritizing savings and debt repayment |
| 3. The envelope system budget | Making your spending more disciplined |
| 4. The 50/30/20 budget | Categorizing “needs” over “wants” |
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The foremost theoretical advantage of ZBB is that it offers a rational and comprehensive means to cut the budget. ZBB can be used to make different cuts to different services based on the perceived value to the organization (rational) and all spending is put under scrutiny (comprehensive).
What is the goal of a zero-based budget? ›
A zero-based budget is a spending plan where you assign every dollar you make to a category so that your planned expenses (including your savings goals) are equal to your income. While it can be a strong way to reel in spending and prioritize saving, it can also be overwhelming or hard to stick with.
What is a real life example of zero-based budgeting? ›
For example, let's say you're using zero based budgeting for your monthly expenses. You begin by listing all your sources of income, then allocate funds to different categories such as rent, groceries, utilities, and entertainment. This method encourages intentional spending and helps you maximize your money.
The biggest difference between zero-based budgeting and the traditional budgeting method is that the budget for each new planning period is created from zero. This enables analytical re-planning.
What is a zero-based budget sentence? ›
The goal of a zero-based budget aims to make all of your income match your planned spending categories. At the end of the budgeting process, you have zero dollars left unassigned.
What is a 100 percent solution? ›
The mass of a solute that is needed in order to make a 1% solution is 1% of the mass of pure water of the desired final volume. Examples of 100% solutions are 1000 grams in 1000 milliliters or 1 gram in 1 milliliter.
How to calculate a 60% reduction? ›
How do you calculate the percentage decrease?
- Original value - new value = difference.
- Difference / original value = decimal change rate.
- Decimal change rate x 100 = percentage decrease.
20% of 60 is 12.
What are at least 2 advantages you see in utilizing a zero-based budget? ›
The Advantages of Zero-Based Budgeting
Alignment with strategic goals: When every line item must tie back to three to five strategic goals of an organization, the clarity on what to prioritize can be significant. Better cost control: Unsupported expenditures from prior years are called into question.
Why is the zero-based budget the best method of budgeting responses? ›
The zero-based budget is the best method of budgeting because: The zero-based budget ensures that every dollar you make is assigned a specific purpose.
Does the government use zero-based budgeting? ›
Under ZBB, agencies were expected to set priorities based on the program results that could be achieved at alternative spending levels, one of which was to be below current funding." For most US governments, the main users of ZBB are legislatures, government agencies, and the executive.
