What is zero-based budgeting?

what-is-zero-based-budgeting

Table of Contents

Zero-based budgeting (ZBB) is used to align company spending with specific strategic goals. Usually, companies use this budgeting method, but families and individuals can also apply it.

Within this article, Innovature BPO will dive deeper into zero-based budgeting, and show you some factors to consider whether this is the right method for your business.

What is zero-based budgeting?

Zero-based budgeting is a method in which all costs must be justified for each new period. The zero-budgeting process starts from “zero-base,” and every function in the organization is analyzed for its needs and costs.

The budget is then built on what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

To let you better acquire, Innovature accounting outsourcing services list down a few key takeaways:

  • Zero-based budgeting will build a budget based on monetary needs for each upcoming period, like a month.
  • Zero-based budgeting helps managers deal with lower costs within the company.
  • It can be used by companies or individuals, and families.
  • When an individual or family uses a zero-based budget, they will allocate all income to specific expenses, including retirement and savings, leaving $0 at the end of each pay period.

Difference between zero-based budgeting and traditional budgeting

What is zero-based budgeting?
What is zero-based budgeting?
What is zero-based budgeting?

Should my business implement zero-based budgeting?

This question is about circumstances and needs, according to Innovature BPO. If your company has the internal discipline and resources to do zero-based budgeting, you can adopt it.

Once you’ve adopted this approach, consider whether it’s the right choice for your business. Do you need cost control? Do you need better insight into your spending?

Remember, this method is not a permanent change. Zero-based budgeting can be set up as a short-term project to streamline spending. This approach is also great for new department heads, who need to be checked before giving them a more traditional budget and power to modify expenditures as needed.

It’s best to set goals, before devoting resources to zero-based budgeting. You’ll need to commit to at least some periods where budgets need to be built from zero. This takes time and personnel, so answer this question before you begin.

For example:

A construction company implements a zero-based budgeting process requiring closer monitoring of manufacturing department expenses. This company found that the cost of some certain parts used in final products and outsourced to another manufacturer increases by 5% every year.

Meanwhile, the company can make those parts in-house using its workers. After considering, the company decided to do in-house manufacturing instead of outsourcing.

Thus, thanks to the zero-based budgeting method, this company can save some costs by manufacturing itself, or buying part of the final products from an external supplier, instead of blindly spending the budget for 100% outsourcing.

Advantages of zero-based budgeting

  • Cost-saving
  • Flexibility
  • Strategic execution
  • Better focus on highest revenue-generating operations
  • Prevention of misallocation of resources

Disadvantages of zero-based budgeting

In addition to the above advantages, zero-based budgeting also has some outstanding disadvantages, including:

  • Time and resource-consuming
  • Omission of some areas such as research, development, and long-term horizon

Instead of struggling to consider whether to apply zero-based budgeting to your business, you can ask for the help of accounting outsourcing services, like Innovature BPO.

With seasoned professionals using up-to-date accounting software, we’ll help you determine if zero-based budgeting is right for your business. Also, our transparency into expenses makes it simpler to create quarterly financial reports, giving you another metric to measure the success of implementing zero-based budgeting.