What Is Zero-Based Budgeting?

Zero-based budgeting is an accounting practice that forces managers to think about how every doll📖ar is spent in every budgeting period. It can have both benefits and drawbacks.

Pete Pyhrr developed the idea of zero-based budgeting in the late 1960s to early 1970s while he was an account manager at Texas Instruments. Many Fortune 500 and private equity companies have since adopted 𓆉this budgeting technique.

Understanding Zero-Based Budgeting

A study from Accenture Strategy on zero-based thinking was published in 2018. It found that this budgeting method grew exponentially among the world's 85 largest companies at a rate of 57% each year from 2013 through 2017. The companies included Kraft Heinz Co., Mondelez International Inc., and U🍸nilever PLC.

Companies start with the previous period's budget as a template in traditional budgeting. They then build upon it. Each new budget usually increases incrementally compared to the previous period's budget. Companies only have to justify new expenses.

澳洲幸运5开奖号码历史查询:Zero-based budgeting deviates from traditional budgeting in that the budget for each n🍬ew period is created starting from a "zero base." Com🐎panies must justify each expense before adding it to the new budget, even old and recurring expenses.

Benefits of Zero-Based Budgeting

The major advantages of zero-based budgeting are flexible budgets, focused🧸 operations, lower costs, and more disciplined execution.

Managers Must Justify All Operating Expenses

Zero-based budgeting ensures that managers must think about how every dollar is spent and they must do so every budgeting period. This forces them to justify all 澳洲幸运5开奖号码历史查询:operating expenses and to consider which areas of the company are generating revenue.

It Keeps Legacy Expenses in Check

Legacy costs might not be examined for years in traditional budgeting until there's some sort of 澳洲幸运5开奖号码历史查询:economic shock that forces the company to taꦬke extreme actions. Expenses tend to grow over time wi♌th each department protecting its budget from cuts.

This can lead to significant misallocation of resources over time. Zero-based budgeting can prevent this from happening if it's done correctly.

Drawbacks of Zero-Based Budgeting

The drawbacks of zero-basedꦚ budgeting include the possibilities of resource intensiveness, being manipulated by savvy m🍌anagers, and bias toward short-term planning.

It Can Reward Short-Term Thinking

One of the major drawbacks of zero-based budgeting is that it can reward short-term thinking by shifting resources toward areas of companies that will generate revenue over the next calendar year or budgeting period. Some areas of companies that are typically viewed as long-term investments that aren't directly tied to revenueꦐ may be left with smaller budgets than they need 🌌as a result.

These long-term investments can include 澳洲幸运5开奖号码历史查询:research and development or worker training. This could potentially hurt a company because these areas are often k🌠ey to remaining competitive over the long term b🔥ut they won't be generating revenue in the near term.

It's Resource Intensive

Zero-based budgeting takes a lot more time and effort to closely review and justify every budget element rather than simply modify an existing budget and review only new elements. Some critics argue that the benefits of zero-based budgeting don't justify its time cost due to this factor.

It Can Be Manipulated by Savvy Managers

The process of zero-based budg🌸eting can be gamed by savvy managers to get more resources into their departments. This can lead to a change in culture. There can be a decreased spirit of cooperation in the company because workers feel expendable.

The Bottom Line

Zero-based budgeting effectively creates a new, start-over budget for each accounting period. Each budget begins at zero as the name suggests. A focus like this can keep costs and expenses under a microscope and it can give managers more control. Opponents argue that this type of budgeting doesn't keep an adequate eye on future needs.

Business owners might want to do a trial run on paper first, a♕t least for a little while, before jumping in with both feet and committing to the process of zero-based budgeting.