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What is Zero-Based Budgeting?

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May 25, 2019


What is Zero-Based Budgeting? 

Zero-based budgeting is a budgeting method that centers around justifying all expenses for each new period. This is where the term "zero" comes from-- the process starts accounting work fresh from a base of zero at regular periods. Zero-based budgeting affords businesses the opportunity to carefully analyze each function within an organization and determine its needs and costs.

Many organizations favor zero-based budgeting because it makes bringing top-level strategic goals into the budgeting process easier. The process is detail-oriented and allows businesses to assess costs and measure them against previous results. 

The process of zero-based budgeting is intended to hold managers accountable for justifying expenses. Rather than focusing almost solely on revenue and regular, incremental budget increases (as in traditional budgeting), zero-based budgeting pushes organizations to drive value and optimize costs, too. 

How Businesses Can Implement Zero-Based Budgeting 

Implementing zero-based budgeting in your business' financial efforts isn't as tough as it may sound. In fact, it can be broken down into a number of simple and intuitive steps to make the process easier:

  1. Identify goals
    • These goals must be measurable and attainable
    • Examples include increasing revenue by X% or slashing costs by X%
  2. Come up with ways to meet those goals
    • Look at the tools and resources you already have first
    • Get creative and look for advice and ideas from all relevant staff
  3. Assess your ideas and select the ones you'll use to work towards your goals
    • Determine which idea (or ideas) you'll need to implement
    • If you need to use multiple tactics, determine whether they'll all be employed at once or utilized one at a time
  4. Prioritize the ideas you select
    • Document the necessary costs for implementation
  5. Evaluate each and every expense associated with doing business over the next period
    • Including the implementation costs mentioned above
    • Every single cost or expense must be accounted for
  6. Provided expenses are justified, implement and follow the budget
  7. Examine measurements and results at the end of the period
    • Assess whether implementation went smoothly
    • Reflect on mistakes and take note of room for improvement

Three Tips for Using Zero-Based Budgeting

Think of your budget as a dynamic, living thing

Anybody familiar with doing business knows that you can only accurately predict so much. By treating your budget as a living document, you'll be better prepared to adjust for changes and react to problems. Aim to create budgets that can and should be set in stone, but never count on them staying that way.

Build a culture

If you want your zero-based budgeting efforts to add value to your company, you'll need to do more than just crunch numbers. You should be actively working to create a company culture that centers around cost manage and visibility. Bringing zero-based budgeting into your organization will naturally help increase accountability and improve attitudes towards a more routine process.

Avoid short-term thinking

Zero-based budgeting can make it easy to get stuck in a short-term mindset. The process revolves around shifting funds and efforts towards specific areas of a company for a given period; but this means that some areas of business that are more frequently considered long-term efforts can get overlooked. Ensure that you regularly assess all of your metrics and goals to avoid this pitfall.

Looking to learn more about how zero-based budgeting can help a business achieve its financial goals? Hoping to learn about something new? Get in touch with the Lorman Education Services Team today. For more than thirty-two years, we've held fast to our dedication to providing training that has a profound impact on your career. Whether you're looking for continuing education concerning HR, legal, banking, or a myriad of other aspects of day-to-day business, Lorman has the resources you need to achieve success.

Resources:
https://www.investopedia.com/terms/z/zbb.asp
https://www.turfmagazine.com/business-management/zero-based-budgeting/


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