Zero-Based Budgeting

 

 

Definition:  A method of budgeting in which all expenditures must be justified each new period, as opposed to only explaining the amounts requested in excess of the previous period's funding.

 

 

For example: If an organization used ZBB, each department would have to justify its funding every year. That is, funding would have a base at zero. A department would have to show why its funding efficiently helps the organization toward its goals.

 

ZBB is especially encouraged for Government budgets because expenditures can easily run out of control if it is automatically assumed what was spent last year must be spent this year.

 

 

 

                                                                                                                                        From: Investopedia

 

 

With ongoing budget freezes and reductions, once again there's a growing interest in zero-based budgeting in school districts.

 

 

If you have experience with this approach to budgeting, particularly the pros and cons, please add comments in the appropriate areas below.

 

 

Pros of Zero-Based Budgeting

 

ZBB is a disciplined approach to budgeting that provides an opportunity to review where financial resources are allocated, and what value can be expected in return.  The ZBB approach also provides a convenient way to prioritize activities.  Activities with the highest contribution to an organizations goal get funded first.  In the case of cuts, it is readily apparent what should be postponed to satisfy budget constraints. 

 

If external funding is a possibility, categorization by activity with an associated cost makes it easier to present to potential sponsors.

 

If an activity is at risk of being cut, individuals that have an affinity for a particular project might be inspired to highlight additional benefits in order to move their activity into a higher priority. Alternately, one or more supporters may propose a way to reduce scope or resource requirements while generating similar value.    

 

Cons of Zero-Based Budgeting

 

 

 

 

Additional remarks