Business owners and top-level managers invest a lot of time budgeting and in bigger organizations, the process itself incurs huge costing. In traditional methods of budgeting, the managers are required to review the previous year’s budget and then make amendments based on the performance expectations. However, in Zero Based Budgeting (ZBB), a completely reverse approach to planning and budgeting is applied.
Zero Based Budgeting doesn’t take into account the previous year’s budget and is instead begins at Zero. The managers need to justify all the budgetary expenses and not limit themselves to the previous year’s budget. Everything starts at zero and the planning and decision making is done on the basis of budgeting. One of the prerequisites of this budgeting is that the mangers need to be ready for detailed documentation and budgeting. The managers also have to identify and even justify the expected expenditures and arrange the activities in accordance to their relevance and costs.
Zero Based Budgeting paves the way for the high level management to make decisions as well as budgetary curtailments based on the documents during any time of the financial year. There is no provision of pre-financing as is in the case of traditional budgeting. This is a big reason why this type of budgeting is followed in the non-profit sectors and government. However, Zero Based Budgeting has to undergo frequent reviews, usually every year, as it is a costly and time-consuming process.
People favoring the Zero Based Budgeting usually point to the following advantages:
- Resources are allocated vis-à-vis requirements and benefits, which is extremely efficient
- Managers are compelled to find cost-effective methods for improving activities
- Inflated budgets can be easily detected
- Service departments find this to be extremely efficient because often it’s difficult to identify criteria
Naysayers point to these disadvantages of Zero Based Budgeting:
- It’s time consuming because defining expenditures is often challenging for the managers
- Zero Based Budgeting needs too many support staff and managers to prepare
- Managers have to be given prior training on this method of budgeting before they can actually begin the process, which again is time-consuming
- Everyone has to be aware of the details as huge volume of data as well as forms are needed for effective Zero Based Budgeting
Zero Based Budgeting is considered to be an honest approach to budgeting but when it is not too practical for private organizations and larger businesses to follow. They are bound to face capital and manpower shortage while trying to implement Zero Based Budgeting.