Zero-based Budgeting

Creating a proper budget isn’t always an objective process, while still being an objective goal. There are many different ways that one can go about creating a budget, and many different accountants have their own processes that they prefer to use. Today, we’re going to discuss a technique that was influential in both the public and private sphere during the course of the 20th century, and is still used by some businesses today: zero-based budgeting. Just how applicable is zero-based budgeting to most situations? Well, it honestly depends on a whole host of factors. Here’s some information about zero-based budgeting…

Basic concept

Essentially, most budgets are created with blanket increases and decreases added or subtracted upon the previous period. It is much more of a macrocosmic way to deal with economic issues. This is called incremental budgeting. However, zero-based budgets are the reverse of that idea. The principle behind a zero-based budget is that all expenses must be justified for each period of spending. This makes every aspect of a budget have a zero base, which is only added upon when absolutely necessary. In this process, every part of the budget is tied to a very specific function. By doing this, a budget can also proportionately increase in areas where revenues are justified.

Pros

Zero-based budgeting offers a highly efficient way to allocate your resources to areas where they will be most beneficial, as this allocation is based on immediate information and needs, rather than what has been in the past. It also allows an operation to be incredibly cost-effective. When creating a zero-based budget, it becomes easy to find areas of the budget that are too costly, and allows for an entity to eliminate operations that are too wasteful of resources. This creates an atmosphere where efficiency and frugality can thrive. The same functions can be accomplished under a zero-based budget for less, in many cases.

Cons

As with all great things, there is a hidden cost that must be evaluated with any sort of work process. While there are an incredible amount of benefits to using a zero-based budget, one must consider what is being lost by taking this route. First off, zero-based budgeting is a far more time-consuming process that can delay important decisions that need to be made. It also can become challenging to quantify the exact cost for each department when the output is more abstract. For example, every line item in a research and development budget may not yield an immediate return, making it hard to place an exact value on specific budgets. These sorts of budgets are also incredibly intricate, and require specialists who can take the time to piece these complex cost-return analyses together.