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.
Reference to any organisation, business and event on this page does not constitute an endorsem*nt or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circ*mstances and, where appropriate, seek professional or specialist advice or support.
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.
Why is the zero-based budget the best method of budgeting? ›
Zero-based budgeting is a way to plan how you use each dollar you earn. This budgeting style may give you greater insight into your finances and provides you the flexibility to customize your budget each month. Zero-based budgets require advance planning, particularly for those with inconsistent incomes.
What is a zero-based budget in your own words? ›
A zero-based budget, sometimes called a zero-sum budget, is when your total income, minus your expenses, equals zero.
Why zero-based budgeting doesn t work? ›
Short-term focus
Zero-based budgeting takes a granular approach to allocating funds, which is effective for cost management, but can shift your focus to the short-term. When you allocate funds to each line-item, you run the risk of deprioritizing long-term projects, especially those that don't have a tangible output.
What are the disadvantages of ZBB? ›
Zero Based Budgeting Disadvantages
Many departments may not have adequate human resources and time for the same. Time-Consuming: This Zero-based budgeting approach is highly time-intensive for a company to do annually as against the incremental budgeting approach, which is a far easier method.
What are the limitations of zero-based budgeting? ›
It takes more time, and therefore more money, to prepare a zero-based budget as compared to an incremental budget. While a budget is typically reviewed on an annual basis, it may be too costly and too time consuming for a small company to do a zero-based budget annually.
What are the disadvantages of zero 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.
What is the conclusion of zero-based budgeting? ›
Zero-based budgeting requires managerial involvement
By necessity, zero-based budgeting requires close involvement from department managers, who are required to justify expenses. This makes it a bottom-up approach to budgeting, as insights on lower levels are communicated to the top.
Is the zero-based budget the most effective type of budget? ›
A zero-based budget is effective due to its detailed planning and less wasteful nature; all expenses must be justified. It promotes diligent use of resources, reduces waste, and provides flexibility as priorities change.
Incremental budgeting
It is the most common type of budget because it is simple and easy to understand. Incremental budgeting is appropriate to use if the primary cost drivers do not change from year to year.
What are three tips for successful budgeting? ›
- Create your budget before the month begins. To stay on top of your budget, plan ahead. ...
- Practice budgeting to zero. ...
- Use the right tools. ...
- Establish needs versus wants. ...
- Keep bills and receipts organized. ...
- Prioritize debt repayment. ...
- Don't forget to factor in fun. ...
- Save first, then spend.
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.
What is zero-based budgeting and steps? ›
With zero-based budgeting, the budget is started from scratch or a “zero base” each year. Using this approach, every line of business within an organization is analyzed for its needs and costs while ignoring historic spending.
What's one drawback of zero-based budgeting? ›
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.
Is zero-based budgeting performance improvement? ›
1 Benefits of ZBB
ZBB can help you improve your financial performance in several ways. First, it can help you align your spending with your strategic objectives and key performance indicators (KPIs).
What is the 50 20 30 rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
