Zero base budgeting (ZBB) is 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 needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.Zero base budgeting is not based on the incremental approach and previous year’s figures are not adopted as a base.
In ZBB, by delinking the budget from the past, the past mistakes are not repeated . Funds required for any activity for the next budget period should spend be obtained by presenting a convincing case. Funds will not be available as a matter of course.
Advantages of Zero Base Budgeting
- Efficient allocation of resources, as it is based on needs and benefits rather than history.
- Drives managers to find cost effective ways to improve operations.
- Consider alternative ways of performing same job
- Coordination within the firm is improved and communication channels are strengthened.
- 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.
- Helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action.
Disadvantages of Zero Base Budgeting
- Time consuming process due to large number of decision packages.
- The cost of preparing the various packages may be very high in large firms involving vast number of decision packages.
- Requires specific training, due to increased complexity vs. incremental budgeting.
- Short term benefits may be emphasised to the detriment of long term planning.
- Ranking of Packages is very resist new ideas and changes as they feel threatened by ZBB.
- Cost and benefits on each packages must be continually up-to-dated to be relevant and new packages are to be developed as soon as new activities emerge.