- Zero-based budgeting
Zero-based budgeting is a technique of planning and decision-making which reverses the working process of traditional
budgeting. In traditional incremental budgeting, departmental managers justify only increases over the previous year budget and what has been already spent is automatically sanctioned. No reference is made to the previous level of expenditure. By contrast, in zero-based budgeting, every department function is reviewed comprehensively and all expenditures must be approved, rather than only increases [ [http://www.small-business-accounting-guide.com/zero-based-budgeting.html Zero Based Budgeting..Learn How To Justify Your Business Forecasts ] ] . Zero-based budgeting requires the budget request be justified in complete detail by each division manager starting from the zero-base. The zero-base is indifferent to whether the total budget is increasing or decreasing.
The term "zero-based budgeting" is sometimes used in personal finance to describe the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward. It would be more technically correct to refer to this practice as "active-balanced budgeting".
"With zero-based processing one can forget about last year, pretend that the program is brand-new, and see if one can provide a detail of expenses for what one would need to fully accomplish the program. This technique will help one to develop a complete picture of what the program actually needs to cost and not just what it has been costing."(Batarla, Rob. "Playbook: Add Value to Your Budgeting Process." "Parks & Recreation", 00312215, Sep 2005, Vol. 40, Issue 9)
Advantages of Zero-Based Budgeting
# Efficient allocation of resources, as it is based on needs and benefits.
# Drives managers to find cost effective ways to improve operations.
# Detects inflated budgets.
# Municipal planning departments are exempt from this budgeting practice.
# Useful for service departments where the output is difficult to identify.
# Increases staff motivation by providing greater initiative and responsibility in decision-making.
# Increases communication and coordination within the organization.
# Identifies and eliminates wasteful and obsolete operations.
# Identifies opportunities for outsourcing.
# Forces cost centers to identify their mission and their relationship to overall goals.
Disadvantages of Zero-Based Budgeting
# Difficult to define decision units and decision packages, as it is time-consuming and exhaustive.
# Forced to justify every detail related to expenditure. The R&D department is threatened whereas the production department benefits.
# Necessary to train managers. Zero-based budgeting must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process.
# In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details.
# Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.
Incremental Budgeting uses a budget prepared using a previous period’s budget or actual performance as a base, with incremental amounts added for the new budget period. The allocation of resources is based upon allocations from the previous period. This approach is not recommended as it fails to take into account changing circumstances. Moreover, it encourages “spending up to the budget” to ensure a reasonable allocation in the next period. It leads to a “spend it or lose it” mentality.
Advantages of incremental budgeting
# The budget is stable and change is gradual.
# Managers can operate their departments on a consistent basis.
# The system is relatively simple to operate and easy to understand.
# Conflicts are avoided when departments appear to be treated similarly.
# Co-ordination between budgets is easier to achieve.
# The impact of change can be seen quickly.
Disadvantages of incremental budgeting
# [ [http://www.small-business-accounting-guide.com/incremental-budgeting.html Incremental budgeting] ] Assumes activities and methods of working will continue in the same way.
# No incentive for developing new ideas.
# No incentive to reduce costs.
# Encourages spending up to the budget so that the budget is maintained next year.
# The budget may become out-of-date and no longer relate to the level of activity or type of work being carried out.
# The priority for resources may have changed since the budgets were originally set.
# There may be budgetary slack built into the budget, which is never reviewed. Managers might have overestimated their requirements in the past in order to obtain a budget which is easier to work within, and which will allow them to achieve favourable results.
* [http://blog-pfm.imf.org/pfmblog/2007/11/indonesia-the-c.html Indonesia – The Challenges of Implementing a Performance-based Budget System, Ian Lienert, IMF, 2007]
* [http://blog-pfm.imf.org/pfmblog/2007/10/making-performa.html Performance Budgeting: Linking Funding and Results, Marc Robinson (ed.), IMF, 2007]
* [http://blog-pfm.imf.org/pfmblog/2007/11/more-on-imf-ann.html More on IMF Annual Meetings Performance Budgeting, Seminar, Marc Robinson, IMF, 2007]
* [http://blog-pfm.imf.org/pfmblog/2007/10/program-and-per.html Program and Performance Budgeting Enthusiasm in India -- IMF Training Course, Holger van Eden, IMF, 2007]
* [http://blog-pfm.imf.org/pfmblog/2007/11/from-line-item-.html From Line-item to Program Budgeting, John Kim, Seoul, 2007]
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Look at other dictionaries:
zero-based budgeting — ➔ budgeting * * * zero based budgeting UK US (ABBREVIATION ZBB) noun [U] ACCOUNTING ► a method for business budgets in which all costs are considered again each year, and each department must say why it needs the amount it asks for: »Zero based… … Financial and business terms
zero-based budgeting — zero base budgeting or zero based budgeting noun A system in which the budget of an organization, department, etc is drawn up anew each year without reference to any previous budget • • • Main Entry: ↑zero … Useful english dictionary
zero-based budgeting — A management policy which calls on all programs to justify every aspect of their funding at the start of each year. The idea behind this policy is that nothing is sacred and all expenditures must be continually justified. ► “Zero based… … American business jargon
Zero-Based Budgeting - ZBB — A method of budgeting in which all expenses must be justified for each new period. Zero based budgeting starts from a zero base and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is… … Investment dictionary
zero-base budgeting — a process in government and corporate finance of justifying an overall budget or individual budgeted items each fiscal year or each review period rather than dealing only with proposed changes from a previous budget. Abbr.: ZBB. Also, zero based… … Useful english dictionary
zero-base budgeting — a process in government and corporate finance of justifying an overall budget or individual budgeted items each fiscal year or each review period rather than dealing only with proposed changes from a previous budget. Abbr.: ZBB. Also, zero based… … Universalium
zero-base budgeting — ZBB A *budgeting methodology based on the recalculation of costs for each budgetary period. In contrast to traditional budgeting, which is based on historical assumptions and incremental changes in relation to prior years, ZBB requires new cost… … Auditor's dictionary
zero-based — or zero base adjective Date: 1970 having each item justified on the basis of cost or need < zero based budgeting > … New Collegiate Dictionary
zero-based — ¦ ̷ ̷ ̷ ̷ ¦ ̷ ̷ adjective or zero base ¦ ̷ ̷ ̷ ̷ ¦ ̷ ̷ : having each item justified on the basis of cost or need zero based budgeting … Useful english dictionary
zero-based — adjective Finance (of budgeting) in which items are costed anew rather than related to previous figures … English new terms dictionary