Budgeting exercise in a typical organization starts with incrementing numbers from previous budgets, such as a 5% increase in expenses, without any rationalization for existing spending. A typical Budgeting manager would most of the times be increasing the expenses taking into consideration inflation.
Thus comes into picture the Zero Based Budgeting (ZBB) to make a reassessment of existing expenses and planning for new expenses from scratch. Traditional budgeting analyzes only new spending, while ZBB starts from zero and takes into consideration revised old inveterate expenses in addition to new expenditures. The main aim of ZBB is to put the responsibility on managers to provide explanation for expenses and it aims at driving value for the company by rationalizing costs and not just concentrating on revenue.
ZBB is essentially a cost control techniques, however it differs with the typical cost cutting approaches as usually they are a onetime effort while ZBB is a continuous ongoing process of rigorously resetting the cost bases. Taken as a whole, ZBB is a challenging and time-consuming activity which may give exceptional results when implemented rightly, whereas it may also have adverse impacts on employee morale due to its aggressive and demanding way of implementation. There may be reduction in Headcounts or some functions being eliminated, combined or outsourced. Thus it becomes particularly significant for the organization to find the correct balance to operate in a successful, sustainable way. By Implementing ZBB organizations have been able to increase visibility and identify cost reduction opportunities like headcount, SG&A, logistics, procurement, overhead expenses & IT etc.
Traditional Budgeting vs. ZBB
ZBB is a continuous ongoing process and it may not be required for every organization to implement ZBB. Decision to implement ZBB must be made after weighing the advantages and disadvantages:
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Advantages |
Disadvantages |
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Checking the Budget Inflation: ZBB overcomes the limitation of incremental budgeting of inflation by rigorously checking each line item every year. |
Desired Expertise: Relooking at processes each year would demand requisite expertise to understand each line item at the bottom level. |
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Rationalizing redundant Activities: The whole process of ZBB revolves around relooking at existing processes and rationalizing activities which have become redundant over time. |
More Manpower for Budgeting exercise: Making the entire budget on ZBB may require the organization to increase the manpower to effectively bring the desired results. |
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Accurate Numbers: As compared to traditional budgeting which involves changing numbers to previous budgets, ZBB demands each department to reassess their costs and thus are more accurate. |
Increased time for Budgeting: Incremental budgets are easier methods which require less time as they don't require to go behind each line item. |
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Efficient use of resources: Rather than looking at existing headcount numbers, ZBB calls for appointing individuals with clear accountability for each activity. |
Delayed response Time: time and training required to do ZBB is higher which may result in staff getting late in responding to a changing market. |
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Efficient: It helps by focusing on current numbers instead of past budgets. |
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Steps for Zero
Based Budgeting: