Zero-Based Budgeting Method

A Zero-Based Budgeting Method is an budgeting method that requires every budget line item to be approved.

• Context:
  • It can produce a Zero-based Budget.
  • It can (often) proceed by each department beginning at zero and adding the cost of essential programs up to an established funding limit
• Example(s):
  • Performance-based Budgeting.
  • …
• Counter-Example(s):
  • Incremental Budgeting, which assumes that the baseline budget is approved.
• See: Budgeting Task.

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References

2016

• (Wikipedia, 2016) ⇒ http://wikipedia.org/wiki/zero-based_budgeting Retrieved:2016-3-18.
  • Zero-based budgeting is an approach to planning and decision-making that reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only variances versus past years based on the assumption that the "baseline" is automatically approved. By contrast, in zero-based budgeting, every line item of the budget, rather than only the changes, must be approved. Zero-based budgeting requires that the budget request be re-evaluated thoroughly, starting from the zero-base; this involves preparation of a fresh budget every year without reference to the past. This process is independent of whether the total budget or specific line items are increasing or decreasing. The term is sometimes confused with "zero-sum budgeting", a personal finance technique of budgeting every unit of income received, and then adjusting some part of that budget downward for every other part that needs to be adjusted upward. Zero-based budgeting also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing. In her campaign for the 2016 U.S. presidential election, Carly Fiorina proposed zero-based budgeting as a practical solution to balancing the federal budget.

• (Wikipedia, 2016) ⇒ http://wikipedia.org/wiki/zero-based_budgeting#Advantages Retrieved:2016-3-18.
  • 1. Efficient allocation of resources, as it is based on needs and benefits rather than history.
    2. Drives managers to find cost effective ways to improve operations.
    3. Detects inflated budgets.
    4. Increases staff motivation by providing greater initiative and responsibility in decision-making.
    5. Increases communication and coordination within the organization.
    6. Identifies and eliminates wasteful and obsolete operations.
    7. Identifies opportunities for outsourcing.
    8. Forces cost centers to identify their mission and their relationship to overall goals.
    9. Facilitates more effective delegation of authority
  • Zero-based budgeting helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action.

• (Wikipedia, 2016) ⇒ http://wikipedia.org/wiki/zero-based_budgeting#Disadvantages Retrieved:2016-3-18.
  • 1. More time-consuming than incremental budgeting.
    2. Justifying every line item can be problematic for departments with intangible outputs.
    3. Requires specific training, due to increased complexity vs. incremental budgeting.
    4. In a large organization, the amount of information backing up the budgeting process may be overwhelming.
• (City Council of Barnstable, 2016b) ⇒ Town of Barnstable. (2016). “Town of Barnstable Adopted Operating Budget - 2017."
  • Zero based budget: A budget building technique where each department begins at zero and adds the cost of essential programs up to an established funding limit. Each year the process begins again at zero prompting close scrutiny and prioritization of costs annually

2015

• http://www.investopedia.com/terms/z/zbb.asp
  • QUOTE: Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a “zero base” and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

    ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.

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