Zero-Based Budget

A budgeting method where all expenses are justified from scratch each period, regardless of previous allocations

A zero-based budget (ZBB) is a budgeting method where all expenses must be justified from scratch for each new budget period (typically annually). This means every single expense, regardless of whether it was included in the previous budget, needs to be carefully evaluated and approved based on its current necessity and alignment with organizational goals.

Here are some key characteristics of ZBB:

• Focus on justification: Every expense requires a clear justification for its existence and its expected contribution to the organization's goals.
• Activity-based costing: Costs are attributed to specific activities and functions to understand their true drivers.
• Prioritization: Resources are allocated to the activities with the highest impact and value first.
• Flexibility: Budgeting is more flexible and adaptable to changing circumstances compared to traditional methods.

Benefits of ZBB:

• Cost optimization: Encourages critical analysis of all expenses, potentially leading to cost savings.
• Improved efficiency: Focuses resources on activities that directly contribute to goals, promoting efficiency.
• Increased transparency: Clearer understanding of how resources are used and why.
• Better decision-making: Encourages data-driven decisions based on justifications and expected outcomes.

Challenges of ZBB:

• Time-consuming: Implementing and maintaining ZBB can be time-intensive and require significant effort.
• Resistance to change: May encounter resistance from employees accustomed to traditional budgeting methods.
• Data requirements: May require access to detailed data and resources to justify all expenses effectively.