Is traditional budgeting not working in the favor of your business as you hoped it’d be? Well, it's time you give a try to Zero-Based budgeting (ZBB), a one of its kind financial management approach in which all the expenses of an organization are planned & held accountable for each new period. Unlike traditional budgeting, the process of devising a Zero-Based Budget starts from zero with a thorough analysis of all the departments of the organization based on their costs and potential to add value. The most interesting part here is that every Zero-Based budget is drawn keeping in mind the needs that can arise in the near future, irrespective of whether it’d be higher or lower in terms of the allocation of resources than its predecessors.
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How Zero-Based Budget Operates?
In a Zero-Based Budget, the organization examines all its expenditures and makes a comprehensive evaluation concerning how necessary they are, and what potential they possess to generate a good rate of return on investment. Now. Some might say what about the time it’d take to devise such a detailed-oriented budget? Yes, it’s true as planning a Zero-Based budget takes considerably more time and effort when compared to a traditional one but at the same time, we can’t ignore the advantages it comes with. It focuses on cost reduction by helping an organization avoid common resource management mistakes.
A Zero-Based Budget can be considered an open-minded cost management strategy with the ultimate goal to improve cost efficiency on a continuous basis. It leaves ample room for frequent discussion on cost-benefit analysis and new reallocation initiatives.
Difference between Zero-Based Budgeting and Traditional Budgeting
Now that you’re familiar with the concept of Zero-Based budgeting, let's take a brief look at how it is different from traditional budgeting in both theory and practice.
- When it comes to traditional budgeting, budgets of previous years usually come into consideration and adjustments are made to them accordingly. Whereas, the making of a Zero-Based budget starts from zero each time, with analysis and justification of all the expenditures.
- Zero-Based budgeting is way more flexible compared to traditional budgeting because it calls for adjustments based on the current situation and needs of the organization.
- It takes less time and effort to do traditional budgeting as compared to zero-based budgeting, which takes a lot of work to justify the necessity of all the expenses and how they will result in a positive return.
- Zero-Based budgeting always emphasizes creating a culture where consciousness and accountability regarding costs are appreciated.
Benefits of Zero-Based Budgeting
- Promote Efficiency
Under Zero-Based budgeting, managers of an organization are encouraged to go over all the expenses, scrutinize them one by one and discuss which ones they should keep in the current business situation. This process helps the management identify the areas where the allocated resources are not generating the desired results and where it needs to put more resources & effort.
The second advantage of Zero-Based budgeting is the flexibility it gives to the organizations. For instance, if there is any change in the priorities or some adjustments need to be made to the expenses, at such times, a Zero-Based budget comes in handy as it’s usually applicable for a short period and starts from zero.
- High return on Investment
The direct impact that Zero-Based budgeting reflects most of the time is a positive influence on the growth of a business and understanding the reason behind this is simple. It not only focuses on controlling the cost of operation but also evaluates the past practices of business. Both these processes ensure that every penny spent is going to the right place and can generate high returns.
Best Practices to Devise A Zero-Based Budget
Now that you’re aware of what A Zero-Based budget is, how it is different from traditional budgeting, and the advantages it has, it’s time to go through the best practices to devise one for your business.
- Understand Your Goals
One of the major rules for running a successful business is having a clear understanding of both the short-term and long-term goals because, without it, the situation would lead to nothing but chaos. The same applies when you need to create a Zero-Based budget. Therefore, the very thing you need to take care of is identifying the priorities of your business and the budget you’re ready to allocate to achieve them.
- Analyze Your Business Operations and Expenses
Here, the second task is to collect as much data as possible concerning the functions of your business and their related operating costs. After that, go through the collected data and try to grasp where you can bring down the operating expenses or do cost optimization and enhance productivity.
- Include Your Team in the Process
No one understands the functions better than the people who actually handle them on a regular basis and this is why including all the relevant stakeholders, be it managers, team leaders, or senior executives can be useful for you. They can provide you with insights or solutions that may not come to you without them. This way you will also be able to make sure that their requirements and priorities are reflected in the budget.
- Collective Decision Making
Things work best when everyone is on the same page and that’s why it’s better if you put a certain set of rules in place to decide whether the estimated expenditure for a function should be approved or not. This will help you ensure all the decisions are not only unanimous but also have been made with complete transparency.
- Keep track of the progress
What’s the benefit if you’re not tracking whether the resources you’ve allocated in the budget are actually generating the expected returns or not? To keep any business stay on track, time-to-time adjustments based on the circumstances are crucial. Therefore, you need to take into account all the updated data regarding work operations and make decisions accordingly for the future.
Being a businessman, using Zero-Based budgeting can put your organization in a win-win situation as it intends to optimize operating costs and enhance work efficiency. It helps you create a culture where your employees are expected to justify their priorities and needs for the resources. Unlike traditional budgeting, a Zero-Based budget is decision oriented & open to adjustments to keep business up with its customer’s demands and focuses on generating high returns on investment.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.