A List of Benefits of Zero-Based Budgeting

by Cam Merritt, Demand Media

In zero-based budgeting, a company draws up its budget from scratch every year, requiring
managers to justify every dollar they plan to spend !raditional "incremental" budgeting, by
contrast, uses the previous year#s budget as a starting point, and managers must e$plain
only why they need more or less money this year than last %ero-based budgeting is time-
consuming, but it can produce a wide range of bene&ts
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Encourages Efficiency
!he chief advantage of zero-based budgeting is that it promotes e/ciency Incremental
budgeting essentially assumes that the previous year#s budget &gure was the "correct"
amount, and therefore the budget needs only to be adjusted based on projections for the
coming year 0ut it never as,s whether last year#s budget was spent wisely or e1ectively 0y
forcing managers to go bac, to square one and justify all their projects as if they were brand
new, zero-based budgeting encourages them to see, the most e/cient, most cost-e1ective
solutions
Makes Room for New Projects
2hen a company that uses traditional budgeting wants to pursue a new initiative -- coming
out with additional products or services, for e$ample, or e$panding into a new geographical
location -- it must try to "&nd money" in the e$isting budget !hat means &ghting with
entrenched interests that want to maintain their slice of the pie 2ith zero-based budgeting,
new projects are placed on par with old projects and can compete for &nancing on a more or
less equal basis Managers of e$isting projects will want to protect their own funding, of
course, but they will be forced to mount a vigorous defense of their own merits
Related Reading: 2hat Is %ero-0ased 0udgeting and 3ow Is It 4sed by an 5rganization6
Focuses the Mission
It#s not uncommon for a company to spend money on long-running projects or departments
that no longer serve its core mission and don#t contribute to pro&ts in any signi&cant way
2hen budgets are prepared incrementally, such spending continues from year to year
through simple inertia -- "2e spend money on it because we#ve always spent money on it"
%ero-based budgeting puts this spending under a microscope, allowing the company to
e$amine whether it would be better o1 shutting down these non-essential operations, selling
them o1 or, in the case of such things as maintenance or payroll services, outsourcing them
Eiminates Redundancy
!he larger a company gets, the more li,ely it is to e$perience redundancies -- di1erent
departments or people doing the same job !hese redundancies may remain hidden in
incremental budgeting but will become evident during the thorough, top-to-bottom review
that comes with zero-based budgeting 5nce management identi&es redundant functions, it
can save money through consolidating them Instead of, say, si$ di1erent wor,ers handling
purchasing for di1erent departments, the company may create a separate, centralized
purchasing department hat needs only three wor,ers, cutting labor costs in half
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Zero-based budgeting
Author: Jim Riley Last updated: Sunday 23 September, 2012
%ero based budget
; )tart each budget period afresh-not based on historical data
; 0udgets are zero unless managers ma,e the case for resources-the relevant manager
must justify the whole of the budget allocation
; It means that each activity is questioned as if it were new before any resources are
allocated to it
; <ach plan of action has to be justi&ed in terms of total cost involved and total bene&t
to accrue, with no reference to past activities
; %ero based budgets are designed to prevent budgets creeping up each year with
in=ation
'dvantages of %00
; *orces budget setters to e$amine every item
; 'llocation of resources lin,ed to results and needs
; Develops a questioning attitude
; 2astage and budget slac, should be eliminated
; >revents creeping budgets based on previous year?s &gures with an added on
percentage
; <ncourages managers to loo, for alternatives
Disadvantages of %00
; It a comple$ time consuming process
; )hort term bene&ts may be emphasised to the detriment of long term planning
; '1ected by internal politics - can result in annual con=icts over budget allocation