Zero-based budgeting (ZBB) is a budgeting approach where all expenses must be justified for each new period, regardless of whether the budget is higher or lower than the previous one.
In traditional budgeting, the baseline is often the previous year's budget, and adjustments are made based on changes in expenses or revenues. In zero-based budgeting, every expense must be justified from scratch, starting with a zero base.
Here are the key features and principles of zero-based budgeting:
No Pre-Existing Assumptions: Unlike traditional budgeting, where certain expenses are assumed to continue from the previous budget, zero-based budgeting requires justification for every expense, even if it was included in the previous budget.
Resource Allocation Based on Needs: ZBB focuses on the efficient allocation of resources based on current needs and priorities. Each expense item is evaluated based on its necessity and contribution to organizational goals.
Decision Packages: Expenses are typically organized into decision packages, each outlining the costs and benefits of a particular activity or function. This allows decision-makers to evaluate and prioritize spending based on the value each activity brings to the organization.
Identification of Cost Drivers: ZBB helps identify the key cost drivers within an organization. By scrutinizing each cost element, it becomes possible to understand where resources are being allocated and make informed decisions about cost reduction or reallocation.
Flexibility and Adaptability: Zero-based budgeting is considered more flexible than traditional budgeting because it encourages a dynamic approach. As priorities and circumstances change, organizations can adjust their budgets to reflect new realities.
Cost Efficiency: ZBB encourages cost-consciousness and efficiency. By requiring justifications for all expenses, organizations can identify unnecessary costs and streamline operations.
Continuous Review and Monitoring: ZBB is not a one-time exercise; it involves continuous review and monitoring of expenses. This allows organizations to stay agile and responsive to changing market conditions.
Focus on Results and Objectives: ZBB shifts the focus from inputs (how much money is available) to outputs (what results are expected). This helps align budgeting with strategic objectives and ensures that resources are allocated to activities that contribute most to organizational success.
Implementing zero-based budgeting can be resource-intensive, as it requires a thorough analysis of all expenses. However, proponents argue that the benefits in terms of cost savings, improved resource allocation, and increased accountability justify the effort.
Organizations may choose to adopt zero-based budgeting for specific departments or the entire organization based on their goals and financial management philosophy.
In India, zero-based budgeting was adopted by the Department of Science and Technology in 1983 and later implemented by the Indian government in 1986 as a system for determining expenditure budgets.
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