What is Zero-Based Budgeting (ZBB): Meaning, Process & Examples | Tally Solutions (2022)

Tally Solutions |Updated on: September 29, 2021
  • What is zero-based budgeting?
  • Zero-based budgeting process
  • When to use zero-based budgeting
  • Zero-based budgeting example
  • How accounting software helps in managing budget?

What is zero-based budgeting?

Let us begin by exploring the zero-based budgeting meaning. Zero-based budgeting or ZBB is budgeting with a reset button as it starts with zero after every period. Every new budget that is created starts from zero and the budgeting is independent of earlier targets set by the business. It is one of the most sustainable cost savings methods when planned and implemented correctly. Zero-based budgeting has been found to reduce SG&A costs anywhere from 10% to 25% within a year. Businesses that have properly implemented ZBB have found to be more productive in the long run when they really drilled down and found the cost drivers before embarking on the ZBB journey.

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ZBB doesn’t mandate that cost-cutting occurs to the bone as the cost reduction depends on the top-down target which means it varies from business to business. A myth that is popular is that zero-based budgeting takes ages to come into effect and it is too cumbersome. While it is true that the process is effort-inducing, ZBB can take less than 1 year to come into effect. Zero-based budgeting involves building a culture of managing costs so it isn’t the responsibility of a single individual. It makes cost management practices be followed by all employees so everyone is a part of reducing business costs. ZBB is structured and organized.

What is a budget?

A budget is a plan which predicts the expenses, profits, and revenue of a business. For example, a business can have different budgets for production, department, capital expenditure, and sales. A budget is future-oriented as it projects what activities a business will undertake and the financial plan of doing them. Businesses create a master budget that contains the major points of various budgets. Separate budgets are created to specify details of those particular budgets. A budget is regularly reviewed and tweaked so that it best reflects reality. The budget amounts are compared to the actual amounts and the difference is known as the variance.

Zero-based budgeting process

The zero-based budgeting process outline is as follows.

(Video) Zero Base Budgeting (ZBB) , process of Zero base budgeting , Advantages of zero base budgeting

Step 1: Business goal

When the new accounting period starts, the first step is to clarify and specify your business goals. Is your main aim to cut costs or is it to increase profits or both? Start with a single business goal and then ensure that the goal is measurable.

Step 2: Activities to achieve the goal

This zero based budgeting step involves the activities that you need to undertake to achieve the business goals you set in the first step. You need to take a good look at the best way to allocate resources for achieving the said goals.

Step 3: Determine cost drivers

Next, you must determine the costs associated with the actions you need to perform to achieve business goals. Add the costs that are already associated with operating and maintaining your business if those are necessary expenditures.

Following the zero-based budgeting, you need to implement the tasks you deem to be most important and follow the budget as you created it. After the period is over, you need to measure the real result with the expected results to determine if the goals are achieved. The next budgeting period will start with zero again and the cycle will continue.

(Video) TOPIC 2: ACCOUNTING / What is Zero-Based Budgeting (ZBB)?

When to use zero-based budgeting

Businesses that are struggling to effectively manage their costs can make use of zero-based budgeting. ZBB is a more thorough and strict form of budgeting that requires time to implement. Businesses that have a cost reduction target of 10 per cent or less can make use of this type of budgeting. It is also suitable for businesses that are willing to take on the challenges posed by zero-based budgeting. Zero-based budgeting requires training as it requires the creation of a cost-saving culture among employees. Businesses that are willing to put in the effort can consider using zero-based budgeting as it is most likely to bear fruit in the long term.

Zero-based budgeting can be used by businesses of all sizes and all types as it can lead to big savings over time. Business owners often wrongly believe that ZBB is only for businesses that are unable to grow. Businesses can implement zero-based budgeting for growth as it can act as a growth booster. It does this by allocating the unproductive costs to productive endeavors. Small businesses and growing businesses can effectively use zero-based budgeting for better growth in the short term. It can also be used by businesses that are using traditional cost-cutting methods but want a more cost reduction.

Zero-based budgeting example

Zero-based budgeting is best explained with an example. Let us assume you run a beauty parlour. You purchase hair oils, creams, facial kits, and so on for $20,000. When you sit down to create a budget, you notice you can make some products with natural ingredients so now you need to only buy $15,000 worth of products. This is the new expense budget. Next, you realize that you leave the lights on for far too long than necessary. You can save on your electricity bill by turning off the lights when not in use. This can save you an additional $500. You realize disposable items can be used which are cheaper and economical so you save an additional $1000.

Zero-based budgeting Vs. traditional budgeting

Here is how zero-based budgeting differs from traditional budgeting.

Zero-Based Budgeting

Traditional Budgeting

It does not take into account the budgets that were created the previous year or the years prior. It always starts budgeting from scratch which is zero. This means always looking at budgeting with a fresh outlook and not having any assumptions as well as targets from previous years.

(Video) Zero-Based Budgeting Defined: The Advantages and Disadvantages of ZBB

It involves tweaking budgets that were made in the past by making adjustments so they are close to the real expenditures that take place in the business. Traditional budgeting always takes into account what was done previously and how it was done.

Zero-based budgeting requires justification of expenditure. Every dollar is accounted for in this type of budgeting, making it more thorough and realistic. It involves high visibility into the various cost drivers making this type of budgeting a more sustainable cost reduction approach.

Traditional budgeting takes a lenient approach and it is mainly used to drive revenue rather than look for ways to reduce costs from individual units. It isn’t so specific about accounting for every dollar. It involves an increase in spending or cost reduction, but not to the minute level of zero-based budgeting.

It requires more effort and time because everything is analyzed deeply before the preparation of a budget. Moreover, training is required to ensure the budgeting is implemented correctly.

It is generalized and requires less effort and time to create when compared to zero-based budgeting. Implementation of traditional budgeting isn’t as effort-inducing in comparison thereby allowing every type of business to easily try it.

Zero-based budget spending decisions are made by managers. The spending depends on which activities are performed and how they should be performed so they can be cost-effective. The focus is more on optimizing costs rather than just revenue increase.

Traditional budget spending decisions are taken by the top management of a business. It leans more towards how business activities should be performed. It doesn’t go deeper such as which activities should be given priority.

(Video) Zero Base Budgeting

It is better at connecting cost reduction with sets of business activities. This makes it much clearer to follow and implement. It divides the activities according to which department it needs to be done by and so on.

It is more about determining a change that is applied to all such as an increase in spending by 1%. This generic nature doesn’t specify in detail how the activities are tied to the budgets making it confusing to implement.

How accounting software helps in managing a budget?

A lazy approach to budgeting will never suffice because a budget can act as an outline and a solid plan to take your business in the right direction. Accounting software enables businesses to better manage their budgets and allocate funds for maximum cost savings. TallyPrime is an accounting software solution that enables you to create budgets for groups, cost centres, and ledger accounts. You can create a hierarchy of budgets with a master budget and sub-budgets underneath it.

What is Zero-Based Budgeting (ZBB): Meaning, Process & Examples | Tally Solutions (1)

Setting budget in TallyPrime

You can even generate accurate variance reports that enable you to see how close the budget amount or actual amounts are. Accounting software makes budget implementation effortless.

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FAQs

What is the meaning of zero-based budgeting explain with examples? ›

Zero-based budgeting (ZBB) is a budgeting technique in which all expenses must be justified for a new period or year starting from zero, versus starting with the previous budget and adjusting it as needed.

What is zero-based budgeting explain the process of zero-based budgeting? ›

Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history. As opposed to traditional budgeting, no item is automatically included in the next budget.

What is zero-based budgeting state its features process and advantages? ›

Zero-based budgeting ensures that managers think about how every dollar is spent, every budgeting period. This process also forces them to justify all operating expenses and consider which areas of the company are generating revenue.

What does ZBB mean? ›

Zero-based budgeting vs. traditional budgeting
Traditional budgetingZero-based budgeting (ZBB)
Justification is not typically requiredCost and benefit justification required
Management decides on expendituresLine(s) of business management propose expenditures
Less clarity and responsivenessGreater clarity and responsiveness
4 more rows

What are the steps of zero-based budgeting? ›

How Zero-Based Budgeting Works?
  • Begin budgeting with zero balance.
  • Decide the objective of budgeting.
  • Analyze business activities. ...
  • Study the budget components to determine the relevance of expenses, cost reduction, and the scope for saving.
  • Prioritize the activities that need cost reduction.
  • Finalize a budget plan.

What is the meaning of zero-based? ›

Definition of zero-based

: having each item justified on the basis of cost or need zero-based budgeting.

What is zero-based budgeting PDF? ›

The zero-based budget represents a system for preparation of the financial budget which includes all the expenses that must be allocated for each new fiscal year. The budget starts from the "zero points" and any function within the unity government is analysed according to their needs and costs.

Why is zero-based budget the best method? ›

The zero-based budget keeps you aware of how much money flows in and out. This can prevent you from spending what you don't have. “The zero-based budget keeps you aware of how much money flows in and out. This can prevent you from spending what you don't have.”

Who Defined zero-based budgeting process? ›

Zero-based budgeting (ZBB) is a budgeting method where all expenses must be justified and approved in each new budget period. Developed by Peter Pyhrr in the 1970s, the organisation's needs and costs are analysed by starting from a "zero base" (i.e., no funding allocation) at the beginning of every period.

Who introduced zero-based budgeting? ›

Peter A. Pyhrr developed what he then termed zero-base budgeting (now more commonly known as zero-based budgeting) in the 1960s, and implemented it at Texas Instruments. In 1970, he wrote a Harvard Business Review article about it, and it quickly gained a following.

What is the other meaning of zero? ›

Zero is commonly used in a general way to mean none or nothing. Synonyms for this sense of the word include nil, naught, nought, and aught. Sometimes the word no can be used to mean the same thing as zero, as in We lowered the price but we had no offers—and I mean zero offers.

What are the types of budgeting? ›

Five Types of Budgets: Which One is Right for You
  • Incremental Budgeting. The traditional approach referred to above is also known as incremental budgeting. ...
  • Activity-Based Budgeting. ...
  • Value Proposition Budgeting. ...
  • Zero-Based Budgeting. ...
  • Driver-Based Budgeting. ...
  • The Role of Technology.
25 Aug 2021

Is zero-based budgeting good? ›

ZBB is great for cutting costs, but it doesn't have to mean severely cutting your budget. With ZBB, you have true control over how much cost you cut. ZBB allows you to be aggressive about cutting costs, but how much you cut and where you reallocate funds is entirely up to you.

What are the 5 steps of budgeting process? ›

5 Steps to Creating a Budget
  • Determine how much money you make every single month. Write this amount at the top of your paper. ...
  • Calculate how much money you spend every single month. List out all the things you pay for each month. ...
  • Examine your spending. ...
  • Develop a plan. ...
  • Record your spending and track your progress.
3 Apr 2020

What are the 6 steps of the budgeting process? ›

Six steps to budgeting
  • Assess your financial resources. The first step is to calculate how much money you have coming in each month. ...
  • Determine your expenses. Next you need to determine how you spend your money by reviewing your financial records. ...
  • Set goals. ...
  • Create a plan. ...
  • Pay yourself first. ...
  • Track your progress.

What is a zero value meaning? ›

zero value [the ~] noun

A value equal to 0 (zero). the zero value. – A value equal to 0 (zero).

What is zero-based budgeting in business? ›

Zero-based budgeting means budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending. By starting from a 'zero base' at the beginning of each budget, you can create a really effective process for analysing and deciding where to allocate your funds.

Who Defined zero-based budgeting process? ›

Zero-based budgeting (ZBB) is a budgeting method where all expenses must be justified and approved in each new budget period. Developed by Peter Pyhrr in the 1970s, the organisation's needs and costs are analysed by starting from a "zero base" (i.e., no funding allocation) at the beginning of every period.

What is zero-based budgeting PDF? ›

The zero-based budget represents a system for preparation of the financial budget which includes all the expenses that must be allocated for each new fiscal year. The budget starts from the "zero points" and any function within the unity government is analysed according to their needs and costs.

What is meant by zero budgeting in the government? ›

The process of zero-based budgeting involves review and justification of each and every ministry's expenditure in order to receive funding at the beginning of each financial year. In zero-based Budget, no balances are carried forward, or there are no pre-committed expenses.

Why is zero-based budget the best method? ›

The zero-based budget keeps you aware of how much money flows in and out. This can prevent you from spending what you don't have. “The zero-based budget keeps you aware of how much money flows in and out. This can prevent you from spending what you don't have.”

What are the 3 types of budgets? ›

The three types of annual Government budgets based on estimates are Surplus Budget, Balanced Budget, and Deficit Budget.

What are the types of budgeting? ›

Five Types of Budgets: Which One is Right for You
  • Incremental Budgeting. The traditional approach referred to above is also known as incremental budgeting. ...
  • Activity-Based Budgeting. ...
  • Value Proposition Budgeting. ...
  • Zero-Based Budgeting. ...
  • Driver-Based Budgeting. ...
  • The Role of Technology.
25 Aug 2021

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