Zero Based Budgeting is a method of budgeting wherein no base is considered for any budget. In this blog, we discuss the benefits an advantages of Zero-Based Budgeting.
As the name indicates, zero-based budgeting is a budgeting method in which there is a zero base consideration while preparing the budget. It justifies all the expenses each time, we prepare a new budget. Zero-based budget does not aim to consider any base.
Each expense has to be drilled down and analyzed well before the actual allocation of the budget. It is known as need analysis. The preparation of the budget is based on the actual need for the expenses for the forecasted period. It does not consider the fact that the previous budget was lower or higher than the current budget.
Zero-based budgeting targets to identify efficient and alternative methods for the organizations who opt for optimum utilization of resources. This will not only ensure efficiency and effectiveness but also wealth and profitability.
Advantages Of Zero-Based Budgeting
Emphasize On Decision Making
Traditional budgeting considers the fact that “how much” expense shall be incurred. However, benefits of zero-based budgeting lay in the “why” approach. It goes to the root of the expense. It aims towards achieving the objectives of organization. For better decisions, it completely ignores the past years’ figures.
Orientation Towards Cost-benefit Analysis
One of the objectives of zero-based budgeting aims at cost-benefit analysis. It does not focus on studying the changes in expenses and preparing a variance analysis such as why the expenses increased or reduced. However, it considers the necessity of the expense and the benefit which will be derived from the expense. To prepare an effective zero-based budget, more and accurate information is a must. It operates vertically as well as horizontally. And hence it enables all the levels of management to participate in the decision-making process of the organization.
Efficiency In Resource Allocation
The ultimate objective of any organization is to maximize the profitability of the organization and enhance the wealth of the shareholders. One of the advantages of zero-based budgeting is that it helps in achieving this objective. It ensures that the resources of the organizations are economically and efficiently allocated.
Improvement For Next Period
For each year, the preparation is with the same assumption of not taking a base for any previous period. Each department of the organization analyzes the expenses every year. They make sure that there is an inclusion of only those expenses in Zero-based budgeting that are necessary and which derive benefits.
Discontinuation Of An Obsolete Process
At first, the the objectives of zero-based budgeting is to identify all the obsolete processes of the manufacturing unit or other departments of the organization. If the process is not essential for the organization, the same has to be analyzed and scrapped by the management. Discontinuation of obsolete operations results in better costing, better pricing, and better profitability of the organization. It helps in enhancing the interpretation and knowledge of different cost patterns.
Changes With The Change In An Organization
Due to technological changes, with the new and advanced processes, the underlying assumptions and expenses have to be changed. Hence, zero-based budget responds to the changes in the organization. This is one the undeniable advantages of zero-based budgeting.
It Strengthens Strategic Growth and Transparency
With its emphasis on justified expenses and integration of spend with organizational goals, it 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.