Zero Based Budgeting

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Summary

What is Zero Based Budgeting? Meaning.

Zero-Based Budgeting (ZBB) is a technique that sets all budgets to nil at the beginning of the year or period and requires from the departments that they justify all of their expenditures, not just those exceeding the budget. Money is allocated to the departments based on merit and not based on past results or on the previous year budget plus or minus some percentage such as in many traditional budgeting systems.


Its aim is to achieve is an optimal allocation of resources that incremental and other budgeting systems cannot achieve. Managers are asked to identify and justify their areas of work in terms of decision packages prior to starting the work.


ZBB was pioneered in the early 60s at Texas Instruments by Peter Phyrr.


Typical Steps in the Zero Based Budgeting Process

  • Identification of "decision units". A decision unit is any part or organ of the business that will operate independently with its own budget.
  • Break down decision units into decision packages: proposals with a detailed description of a specific activity (objective, funding needs, justification, technical viability, alternatives).
  • Ranking of decision packages according to their importance using predefined (quantitative and qualitative) criteria.
  • Allocation of funding to decision packages by top management.

Advantages of Zero Based Budgeting

  • The budget process focuses on a comprehensive analysis of objectives and needs.
  • Planning and budgeting are combined into a single process.
  • Managers must evaluate the cost effectiveness of their operations in detail.
  • Cost awareness and management participation in planning and budgeting is expanded at all levels of the organization.
  • Well suited to companies with small margins, like those in the fast-moving consumer goods (FMCG) sector.

Criticisms and drawbacks of Zero Based Budgeting

  • The huge amount of work involved.
  • May lead to micro management, offering less time and energy for the things that really matter.
  • There is a risk of short-term thinking in allocation of funds and of underinvesting in strategic (R&D) initiatives.
  • Fierce competition between units for funding may undermine employee morale (fear of loss of jobs, less feeling of belonging to the overall firm).

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Objectives of Zero Based Budgeting (ZBB)?
What are the objectives of Zero Based Budgeting? (...)
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Zero Based Budgeting and Day to Day Running Costs
With zero based budget how do you budget for your day to day running costs if it changes day to day, month to month. As (...)
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Zero Based or Activity Based Budgeting?
If I use an incremental budget at current. Which am I best to start using as a replacement method, zero based budgeting (...)
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🔥 NEW Zero Based Budgeting Website
Would setting up a Zero Base Budgeting website that would incorporate into a one-stop shop (or at least link to) all the (...)
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The Idea of Zero Based Budgeting (ZBB)
All the above points are true, but lose sight of the forest for the trees. ZBB is a process of alternatives, not austeri (...)
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Involve Middle Management in Budgeting Process
In what ways can middle management in a firm become more involved in the budgeting process? (...)
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Zero Based Budgeting In-depth: Benefits, Limitations, Implementation Issues, Best Practices, Results

Financial Management, Zero Based Budgeting
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Compare with: Beyond Budgeting  |  Balanced Scorecard  |  Activity Based Costing

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