Zero Based Budgeting

Description of Zero Based Budgeting. Explanation.

Definition Zero Based Budgeting. Description.

Zero Based Budgeting 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 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.

Zero-Base-Budgeting was pioneered in the early 60s at Texas Instruments by Peter Phyrr.

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.

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.
Does it really lead to a material shift in the use of resources?

Zero Based Budgeting Forum (6)

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 interest / needed?
I detect current topical interest in zero base budgeting -- particularly in light of massive government deficits everywhere.
But a lot of the good ZBB literature is not yet accessible on the internet. (I know, as I wrote two books on the subject, and several articles, including a couple of ghostwritten ones for Carter that are no where to be found: the journal that published one hasn't uploaded their article yet, and no one at the Carter Presidential Library in Atlanta seems even to be aware of it!). Maybe they zero-based the card catalogue of their holdings ;-) ?"

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 -- especially at the operating levels -- to come up with creative, better alternative ways of doing things differently than they've been done in the past, then to define levels of effort and spending for each -- from a bare bones minimum to incremental ups -- for ranking and decision making.
The result is sometimes a "cut" in spending from past levels. But creative minds often come up with something involving more spending.
It requires a lot of commitment of time -- and emotion -- and most organizations might be better off doing it every 2-3 years."

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 of the previous year and then base your budget on that with the increment that is supplied to you by the supplier in the beginning of your financial year."

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?"