Zero-Based Budgeting (ZBB) is a budgeting method where all expenses must be justified for each new period, starting from a "zero base." Every function within an organization is analyzed for its needs and costs, and budgets are built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one. This approach contrasts with traditional budgeting, which often bases new budgets on previous ones with incremental adjustments.
When implementing ZBB, it's essential to adopt a strategic approach including:
Benefits:
Challenges:
Traditional budgeting is based on the previous year's budget, adjusting it as needed, often with incremental increases. It is cost accounting-oriented, and management decides on expenditures without necessarily requiring justification for each expense.
On the other hand, ZBB starts from scratch every budget cycle, requiring justification for all expenditures, new and old. It is decision-oriented, promotes greater clarity and responsiveness, and involves line(s) of business management proposing expenditures.
Successful ZBB implementation involves:
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