Zero Based Budgeting Pdf

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  1. Zero Based Budgeting Form
  • Definition: Zero Based Budgeting, also called ZBB, is the process of creating a budget from nothing without using the prior year’s budget or spending numbers.No activities are assumed to be untouchable.
  • Zero-based budgeting can be accomplished using a budget worksheet, budget software, or our free budget app. Start budget planning today! Skip to Main Content. Learn How to Budget. Want less stress? Follow these four easy steps to take control of your money.

Zero-Based budgeting and traditional budgeting are the two predominantly used budgeting techniques. These techniques help the companies to allocate capital to different departments. These methods of budgeting vary from each other in many aspects viz. justification of data, the base of budgeting, ease in the modification of budget components, the time required, allocation of resources, ease of preparation and training, etc.

Both the methods have their own advantages and disadvantages. , So companies need to wisely choose the preferred method choice, depending on what they desire to achieve through the budgeting process. Before going through the difference between zero-based budgeting and traditional budgeting, let us understand their meaning of in brief.

GFOA received a grant from the City of Calgary, Alberta, to study zero-based budgeting for public employers. GFOA used the grant to conduct independent research using a survey of GFOA members, case studies, and secondary sources. The findings and resulting publication were reviewed and approved by an independent panel of GFOA members.

Zero-based budgeting is a budgeting method where current year’s budget is prepared from the scratch i.e. taking the base as zero. The old and the new activities of the business are ranked according to their importance and based on that, resources are allocated to each activity without considering the past budgets or achievements.

Traditional budgeting is a method of preparation of the budget in which the last year’s budget is taken as the base. Current year’s budget is prepared by making changes to previous year’s budget by adjusting the expenses based on the inflation rate, consumer demand, market situation etc. While preparing the traditional budgets the past year’s revenues and costs form an integral part of current year budget, as current year’s budget is prepared by taking them as the base

Table of Contents

  • 1 Zero Based Vs. Traditional Budgeting

Zero Based Vs. Traditional Budgeting

Following points will highlight the points of difference between zero-based budgeting and traditional budgeting.

Budgeting

Justification of Data

Zero-based budgeting is done taking the base as zero as if there is no past or historical data. Here all the items in the cash flow need to be justified. So a new expense or income, as well as an old expense or income, requires a justification. While preparing the traditional budgets, only the items which are over and above the last year’s budget need to be justified. So, only incremental changes require an explanation, not everything else.

Base for Budgeting

Zero-based budgeting is done considering the base as zero (without considering the budget of the previous year). For every financial period, a fresh budget is prepared from the scratch. On the other hand, traditional budgeting uses previous year’s budget as a baseline to make current year’s budget. So the main stress lies on the previous level of expenditure.Ease of Modification of Budget Components

In case of zero-based budgeting, it is easy to eliminate an existing item or add a new item to the current budget, as zero-based budgeting is a creation of entirely new budget from the ground. In other words, zero-based budgeting is more flexible in nature. Same is not the case with traditional budgeting. In traditional budgeting, it is difficult to modify budget components. Moreover, every year’s budget components are not exactly same. Budget components change depending on the market conditions and company’s objectives. Since traditional budgeting depends on preceding year’s budget, it is not necessary that the company uses same budget components as it used in preceding years budget. Hence it is very difficult to modify or eliminate an existing item or add a new item in the current budget. In other words, traditional budgeting is comparatively rigid in nature.

Time Required

One of the biggest problems with zero-based budgeting is that it is a time-consuming process as the budget is prepared right from the start. Any project, before being added to the budget, goes through a lot of comparisons and approvals which lead to spending excessive time on each project. On the other hand, traditional budgeting is less time-consuming. Since changes are done in the previous year’s budget to meet the needs of the current period, half the work is already done before the budget process starts and only incremental changes are required.

Allocation of Resources

In zero-based budgeting, the budgets are prepared by allocating maximum resources to those activities which benefit the organization. The activities which are revenue generating and critical to the survival of the business, get the topmost priority. So with zero-based budgeting, the management can focus on priority decisions. Traditional budgeting is done without giving any priority to vital activities of the business and last year’s budget is simply adjusted considering the inflation factor.

Ease of Preparation and Training

Zero-based budgeting requires justification for allocation of available resources, which can be known only after deep analysis and complex calculations. Managers require special skills and knowledge to prepare zero-based budgets. Only a qualified and well trained professional can prepare such budgets. Thus, preparation of zero-based budgets is a complex task. Whereas, traditional budgets are fairly easier to prepare as they do not involve complex calculations.

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Last updated on : September 22nd, 2018
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Zero-based budgeting (ZBB) is elegantly logical: Expenses must be justified for each new budget period based on demonstrable needs and costs, as opposed to the more common method of using last year’s budget as your starting point, then adjusting up or down. ZBB is a straightforward, intuitively simple way to aggressively strip out costs that cannot be rationally justified. Who would argue that a business should not eliminate unjustifiable costs?

ZBB has been around for decades, but is currently enjoying a revival driven by powerful investors like 3G Capital Partners, the force behind the 2015 merger of Kraft Foods and H.J. Heinz. Such high-profile exposure has prompted more companies to view ZBB as a fresh “wonder diet” for achieving radical corporate leanness. ZBB’s resurgence is further fueled by the uncertain markets hindering many companies’ efforts to attract fresh capital, as we see venture capital and private equity funds increasingly pushing ZBB on their portfolio companies, in the hope of securing a more rapid and profitable exit on their investments.

Yet for all the promise of ZBB, many companies that try it soon grow disenchanted. They find that the process is a distraction to their people, that it does not deliver all the cost savings they anticipated, and that many of the costs they do eliminate soon creep back in, making the whole effort feel futile. One might conclude from such failures that implementing zero-based budgeting is simply too ambitious. We believe the exact opposite to be true. Most ZBB implementations are not ambitious enough.

Traditional ZBB implementations focus almost exclusively on simple SG&A, in part because SG&A benchmark data is far more readily attainable than are relevant data from the core functions of comparable companies. In comparison to other methods (such as Six Sigma or activity-based costing), ZBB typically does not address operational excellence in core processes (marketing, sales, supply chain, procurement, manufacturing) or fundamental cost drivers such as portfolio complexity, organizational complexity, customer complaints, and quality issues. Also, ZBB does not challenge existing process design, which can now be completely re-thought and often drastically improved through digitization. Rather, the most visible outcomes of many ZBB efforts are burdensome policies (such as travel cost restrictions) that fail to address the underlying fundamentals (such as who needs to travel, why, and when). The result is a superficial and simplistic focus on “policing” costs versus substantive cost prevention.

A related issue is that ZBB is often executed exclusively within organizational silos. When cost packages are analyzed in isolation, ZBB completely overlooks the substantial cost reductions attainable at the interfaces between functions.

To realize larger and more lasting value from zero-based budgeting, companies must take a more substantial and ambitious approach. That means blowing up the boundaries that have confined ZBB and taking a true end-to-end view of what drives business value.

This broader approach to ZBB leaves nothing out of scope, pursuing fresh efficiencies in contracting practices, make-versus-buy tradeoffs, demand reduction, requirement simplification, operational efficiency, applied analytics, rules and policies, and much more.

Companies must attack costs not just within organizational silos, but those that reside at the intersection of functions as well, bringing into scope a whole range of costs not addressed in typical ZBB implementations.

Finally, while traditional ZBB typically imposes budget targets based on benchmark data, then leaves the organization largely on its own to determine how it might comply, this more ambitious version of ZBB mobilizes the organization to systematically attack costs using rigorous, time-tested tools and methodologies, with the various initiatives prioritized, coordinated and supported by a business transformation office. The incentive model is also adapted to support aggressive pursuit of the target budget, and a dedicated budget governance structure prevents costs from creeping back in.

This form of ZBB implementation includes many classic features of performance improvement initiatives, but the aggressive ZBB targets can inspire extraordinary effort. For example, when we identified a substantial logistics cost gap in a large consumer goods company, the supply chain director told us: “It’s impossible to solve. We have tried. Nothing worked. We just have to live with it.” He argued that labor cost was the main issue, and the union was strong enough to block any cost reduction initiative. It was apparent that others in the company shared this view. Simply imposing a cost-reduction target and walking away would accomplish little here, so we engaged finance, logistics and the senior leadership team in pursuit of a creative solution. As the dialogue progressed, it became clear that while the intractable labor cost was an important factor, so were truck utilization, margin negotiation, and service-level agreements with freight companies. We then structured a simulator to test various scenarios for negotiation with freight companies. Freed from their longstanding “there’s nothing we can do about it” mindset, the company soon optimized the budget by 14%, exceeding the target we had initially proposed by four percentage points.

Zero Based Budgeting Form

In another company, commercial discounts was essentially a black box for the finance chief and CEO. Although it was not a cost budget (the typical focus of ZBB), we applied cost-to-serve and net profitability analyses to better define and more rigorously formalize the company’s discount policies, which in turn fostered transparency and alignment toward a targeted adjustment of more than 15%. This significant cost reduction would have been considered “out of scope” in most ZBB implementations.

Implementing ZBB on this much larger scale is more demanding, but zero-based budgeting is always a big bet. The first and most important key making that bet pay is to go big. Only a substantial, ambitious approach that can deliver sustainable cost transformation on a scale that makes all the effort required to implement zero-based budgeting worthwhile.