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).
Forum about Zero Based Budgeting. Below you can ask a question about this topic, share your experiences, report a new development, or explain something.
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 the only way I can think of is if you do refer back to your actual expenditure o...
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 or activity based budgeting?...
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 books, articles, presentations for which copyrights can be gained be of interes...
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 austerity.
The idea of going to zero base is not to cut costs, but to force everyone -...
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Financial Management, Zero Based Budgeting Brief presentation that introduces Zero-based budgeting, including the following sections:
1. Objectives of Budgets
2....
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