Zero Based Budgeting Advantages And Disadvantages Pdf

zero based budgeting advantages and disadvantages pdf

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Zero-based budgeting encourages you to use all of your monthly income for specific purposes. It simply dictates that all of your money gets allocated to a specific purpose.

Zero-based budgeting is an alternative way of creating a budget. Instead of simply justifying changes to a line item, budgeting managers must justify all expenditures. Zero-based budgeting requires paperwork to justify the inclusion of every item that goes into a budget. Additionally, the manager preparing the budget must prepare documentation ranking each budget item according to its importance and cost. This considerable amount of documentation passes to higher-level managers who review the paperwork and have the authority to eliminate budget items they deem not important or too costly.

Advantages and Disadvantages of Zero Based Budgeting

Zero-based budgeting is an alternative way of creating a budget. Instead of simply justifying changes to a line item, budgeting managers must justify all expenditures. Zero-based budgeting requires paperwork to justify the inclusion of every item that goes into a budget. Additionally, the manager preparing the budget must prepare documentation ranking each budget item according to its importance and cost.

This considerable amount of documentation passes to higher-level managers who review the paperwork and have the authority to eliminate budget items they deem not important or too costly.

For successful implementation, managers and staff at all levels must clearly understand the zero-based budgeting process. This involves the training of anyone who will be involved in the budget process so that the concepts of zero-based budgeting are clearly understood. Budgeting managers require training in the justification process. All staff members must be committed to the process for it to work properly. It can be difficult to justify every detail for a budgeted item.

The process is tiring and time consuming and it may not be practical or feasible to justify every expense. Because of this, it is typical for the research and development departments to lose budget dollars because future developments are difficult to foresee. Production departments often benefit. It can also be difficult to justify a line item because more managers are involved in the decision making process.

It takes more time, and therefore more money, to prepare a zero-based budget as compared to an incremental budget. While a budget is typically reviewed on an annual basis, it may be too costly and too time consuming for a small company to do a zero-based budget annually. Diane Stevens' professional experience started in with a computer programming position. Beginning in , running her own business gave her extensive experience in personal and business finance. Her writing appears on Orbitz's Travel Blog and other websites.

By Diane Stevens. Disadvantages and Advantages in Budgeting a Project Task. Documentation Zero-based budgeting requires paperwork to justify the inclusion of every item that goes into a budget. Training For successful implementation, managers and staff at all levels must clearly understand the zero-based budgeting process. Justification Process It can be difficult to justify every detail for a budgeted item.

Frequency It takes more time, and therefore more money, to prepare a zero-based budget as compared to an incremental budget. Related Articles.

Zero based budgeting | Stages | Advantages | Disadvantages

In zero-based budgeting, a company draws up its budget from scratch every year, requiring managers to justify every dollar they plan to spend. Traditional "incremental" budgeting, by contrast, uses the previous year's budget as a starting point, and managers must explain only why they need more or less money this year than last. Zero-based budgeting is time-consuming, but it can produce a wide range of benefits. The chief advantage of zero-based budgeting is that it promotes efficiency. Incremental budgeting essentially assumes that the previous year's budget figure was the "correct" amount, and therefore the budget needs only to be adjusted based on projections for the coming year.

After reading you will understand the basics of this powerful financial management tool. Zero Based Budgeting is a reverse approach of traditional planning and decision making with respect to budgeting. In traditional budgeting, managers begin by reviewing the budget of the previous year and make corrections in revenue and expenditures based on performance expectations. The budget of the previous year is consequently considered to be the baseline starting point. In Zero Based Budgeting all managers are required to justify all budgeted expenses, not just the changes in the budget of the previous year.


ZBB is more time-consuming and complex than traditional budgeting, but offers businesses a powerful cost reduction opportunity by reducing “budget bloat” and minimizing needless expense while prioritizing smart decision making and strategic allocation of resources.


Zero-Based Budgeting: Benefits and Drawbacks

Updated on Jan 05, - PM. In order to understand zero-based budgeting, the first thing one should understand is the various parts of a typical business budget. Here are 3 primary things that a budget must meet:.

It justifies all the expenses each time, we prepare a new budget. Zbb means more focus on analysis of the finer details. Some considerations for the efficiency agenda are also presented.

In order to determine whether the zero base method of budgeting is right for your business, you first need to understand its capabilities and limitations. This budgeting method is forward-facing, rather than relying on historical budget data from last month, last quarter, or even last year. It is also extremely flexible, and can be applied to costs of all kinds: operating expenses, marketing costs, administrative expenses, cost of goods sold COGS , etc. With its emphasis on justified expenses and integration of spend with organizational goals, ZBB encourages project leaders and internal leadership alike to present clear, compelling explanations for their budgets and demonstrate how spend supports their mission and the overall growth, profitability, and competitive performance of the company as a whole.

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