Zero Based Budgeting ZBB Overview and Advantages

Incredible advances in technology and data and analytics (D&A) capabilities have alleviated the primary roadblock to ZBB adoption. Traditional budgeting also only analyzes new expenditures. ZBB starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Zero-based budgeting aims to put the onus on managers to justify expenses. It drives value for an organization by optimizing costs, not just revenue.

Consider a department within an organization that is implementing zero-based budgeting for its annual budget. Instead of simply adding a percentage increase to last year’s budget, the department head and team members review every line item. For instance, they may find that spending on certain software subscriptions can be reduced by switching to more cost-effective alternatives that still meet their needs. They justify each expense based on its contribution to the department’s goals, such as improving customer service or increasing operational efficiency. Through this meticulous review, the department can reallocate funds from underperforming areas to initiatives that offer higher returns or are more strategically important. Companies using ZBB report cost savings between 10 and 25% — vital savings companies can use to bolster their margins or invest in future growth.

Zero Based Budgeting vs. Traditional Budgeting

Zero-based budgeting is a financial strategy that starts from a “zero base” at the beginning of each budgeting period, regardless of previous budgets. This method requires all expenses to be justified for each new period, focusing on cost-benefit analysis and needs assessment. This approach encourages efficient resource allocation, cost reduction, and strategic financial planning. Zero-based budgeting is a technique used for developing annual budgets that complement the budget planning and review process.

Services

Political officials have always had a certain plan or change that they would like to implement that would greatly influence the prioritizing process of ZBB. Certain political officials could say they greatly support a certain program and would like the Finance Department to focus more money on that particular program whilst other political officials would think otherwise. Therefore, any real changes or improvements made will always face opposition unless they have unified political support. A large portion of spending is not included in the ZBB process, like operating expenses, personnel expenses, and government policies that start after the budget year.

Founder & CEO @Practus Harvard Business School (Owner President Management)

Education funding levels are determined in many states partly by state and federal judicial decisions and state constitutional provisions, as well as by statutes. Federal mandates require that state Medicaid funding meet a specific minimum level if Medicaid is to exist at all in a state. Federal law affects environmental program spending, and both state and federal courts help determine state spending on prisons.

It can also help test assumptions, solve problems, and ensure spending is aligned to your company’s growth objectives. Zero-based budgeting starts from scratch, analyzing each granular need of the company instead of using the incremental budgeting increases found in traditional budgeting. This essentially allows for a strategic, top-down approach to analyze the performance of a given project. Spending reviews march on in various forms in more advanced countries but lag elsewhere. Western influence on budgeting was non-existent in China before 1993.

But again, this method locks you into a strategy that might not fit the money goal you’re in the middle of! If you’re on Baby Step 2, you aren’t thinking savings first. You’re focused on kicking debt out of your life forever.

1. But with ZBB, managers build a budget from scratch without using the prior period’s budget as a baseline.
2. Here, you will look at each expense and examine how it benefits the company toward achieving business goals.
3. ZBB creates a system of accountability with each function, wherein managers write down how much is required and what it will be used for.
4. In contrast, zero-based budgeting starts from scratch, requiring a justification for each proposed expense, regardless of whether it was previously approved.
5. As a result, your business becomes more cost-effective and thereby more profitable.
6. 1  See Richard Allen and Robert Clifton, “From zero-base budgeting to spending review – achievements and challenges”, Development Southern Africa, 2023.

Impact on government operations

Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law. We’ve broken the key factors down into short, easy-to-understand concepts so you can quickly share it with your stakeholders and fast-track your ZBB implementation. Powerful partnerships to drive your digital transformation and deliver game-changing strategies. Your hub for Anaplan updates, insights, perspectives, and innovations.

Costs can then be first grouped and then measured against previous results and current expectations. Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process begins from a “zero base” and every function within an organization is analyzed for its needs and costs. The budgets are then built around what’s needed for the upcoming period regardless of whether each budget is higher or lower than the last one.

It was during the 1990s that China began looking out for a new and modern form of budgeting for their country’s nationwide budget reform, and ended up settling on ZBB. The concept of zero based budgeting in india ZBB was first introduced to China at the beginning of the 1990s and was primarily focused on Hubei Province. A new policy was set in place to put ZBB into action there, known as the DBR, or the Departmental Budgeting Reform. According to Jun Ma, a professor at the University of Nebraska, the beginning years of ZBB in Hubei were a bit rocky as the DBR had not yet been implemented in all the state departments in Hubei. Only a few departments implemented the budgeting system, and the results of multiple departments using multiple budgeting systems were not good. It slowly became clear that using ZBB in a traditional sense would not work out.

1. It fosters a culture of accountability, promotes agility in adapting to changing business landscapes, and ensures that every dollar spent contributes to value creation.
2. Traditional budgeting calls for incremental increases over previous budgets such as a 2% increase in spending.
3. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future.
4. Countries with coalition governments may prefer to carry out a comprehensive review at the beginning a new government’s term of office when its policy agenda is first presented.
5. ZBB has many benefits, including more agility in resource allocation, better working capital management, and deeper insights that can unlock more value for the business and drive the business transformation agenda.

CFOs are rethinking their approach to budgeting and have discovered that zero based budgeting (ZBB) has made a big comeback over the past decade. By its very nature, a zero-based budget gives you the breakup and total of how much money you save for a particular year. As a result, your business becomes more cost-effective and thereby more profitable. You need to identify whether the objective is to diversify, increase your customer base, cut costs, increase revenue, etc.