What is: Zero-Based Budgeting

What is Zero-Based Budgeting?

Zero-Based Budgeting is a budgeting technique where all expenses must be justified for each new period. Unlike traditional budgeting methods, where the previous period’s budget is simply adjusted, zero-based budgeting requires every expense to be evaluated and approved from scratch.

How Does Zero-Based Budgeting Work?

In zero-based budgeting, each department or unit within a company starts with a budget of zero and must justify every expense they plan to incur. This forces managers to critically evaluate their spending and prioritize only the most essential expenses.

Benefits of Zero-Based Budgeting

One of the main benefits of zero-based budgeting is that it encourages cost efficiency and accountability. By requiring managers to justify every expense, companies can identify and eliminate unnecessary spending, leading to cost savings and improved financial performance.

Challenges of Zero-Based Budgeting

While zero-based budgeting can be effective in controlling costs, it can also be time-consuming and resource-intensive to implement. Managers may find it challenging to justify every expense, and there may be resistance to change from employees accustomed to traditional budgeting methods.

Zero-Based Budgeting vs. Traditional Budgeting

Unlike traditional budgeting, where expenses are based on the previous period’s budget, zero-based budgeting starts from scratch and requires every expense to be justified. This can lead to more accurate budgeting and a greater focus on cost control.

Implementing Zero-Based Budgeting

To implement zero-based budgeting successfully, companies must have a clear understanding of their goals and priorities. They must also have the necessary tools and processes in place to evaluate and approve expenses effectively.

Examples of Zero-Based Budgeting

Many companies, including consumer goods giant Unilever, have successfully implemented zero-based budgeting to improve cost efficiency and drive profitability. By reevaluating their expenses and focusing on value-added activities, these companies have been able to achieve significant cost savings.

Conclusion

Zero-based budgeting is a powerful budgeting technique that can help companies control costs, improve financial performance, and drive profitability. By requiring every expense to be justified, companies can identify and eliminate unnecessary spending, leading to a more efficient use of resources.