What is Zero Based Budgeting?

The zero-based budgeting method is a strategy used in financial management. In this method, you are encouraged to spend every penny of your monthly income in a planned manner. But this approach does not support a mindset that leads to a shopping frenzy. With this method, you can divide your money into certain categories. These are usually the main headings, such as expenses, savings and debt payments. Other topics that you are curious about the zero-based budgeting method can be found in the content.

What is Zero Based Budgeting?

Zero-based budgeting (ZBB) is a budgeting technique that requires justification of all expenses in each new period or year. This method is a highly effective business planning tool that helps companies identify and reduce unnecessary costs, effectively control their expenses, and focus on high-profit initiatives.

The zero-based budgeting method was developed in the 1970s by Pete Pyhrr, former accounting manager of Texas Instruments. The first goal of this method is to help organizations reduce their costs and support fiscal responsibility. ZBB can be seen as the tactical implementation of the company's strategic plan. Companies must transform their long-term plans into detailed revenue and expense expectations in order to realize the financial and operational objectives in their strategic plans. These expectations can be developed and regulated in the path that the company follows to achieve its objectives.

Budgets promote ownership and accountability by encouraging rational financial decisions to be made. Through the budgeting process, companies can make profit projections, identify potential problems, and explore new opportunities. Finance leaders can use this information to make the necessary adjustments and guide the performance of the company.

The zero-based budgeting method helps companies to better control their expenses and use resources in the most efficient way, as it requires the justification of each expense. In this way, companies can identify unnecessary costs and increase their profitability by eliminating these costs. At the same time, ZBB allows companies to direct their resources to their strategic goals, allowing them to focus on high-profit initiatives.

The fact that a company attaches importance to budgeting plays an important role in making business processes more efficient, as well as especially to the point that they manage their financial planning. Therefore, companies attach importance to the budgeting process and regularly review and update their budgets to achieve their strategic objectives.

The budgeting process aims to transform your organization's long-term strategy into annual activity plans that communicate it to finance, business lines, and operations. This process sets financial goals in each line of business and ensures that these goals are in financial and operational alignment. Items such as revenue and expense budgets, R&D costs, marketing expenses, project costs, revenues and capital expenditures are taken into account in this process.

The budgeting process involves determining how to allocate expenses by analyzing and comparing actual and expected financial performance comparisons. In this process, revenue and expense projections for the next year are prepared on the basis of previous budgets. The traditional method of budgeting usually relies on estimates such as gradual increases over previous budgets, while the zero-based budgeting method requires justification of each expenditure. Zero-based budgeting, unlike traditional budgeting, requires not only new spending, but also justification of past recurring expenses.

A company that implements a zero-based budgeting method starts its budget “from scratch” every year. This approach is done by ignoring the needs, costs and past expenses in almost every business department. The main difference here is the need to justify each item of their expenditure.

Each budget item is reviewed without reference to expenditures made in the past period. Careful consideration is made to increase, maintain, decrease or remove each item. Managers need to consider all elements of the budget. In this way they can identify areas that are cost-effective, relevant and cost saving.

The zero-based budgeting method can be applied to any cost. It can be used in a variety of areas, such as capital expenditures, operational expenses, R&D costs, and even the cost of goods sold. This method allows companies to review all expenses and allows them to plan their budgets in a more strategic way.

Advantages of Zero-Based Budgeting

Zero-based budgeting helps organizations control and optimize their costs. Since the expenses incurred in the past are not automatically recognized and each item of expenditure must be justified, companies can identify unnecessary or increased costs and increase their profitability by eliminating these costs. At the same time, zero-based budgeting helps companies direct their resources towards strategic goals. They can allocate more funds to initiatives and activities with high profit potential. This budgeting approach helps companies improve their financial performance, reduce unnecessary expenses, and make more effective decisions. On the other hand, it increases the sense of responsibility of all departments involved in the budgeting process and ensures accountability. The main advantages in this regard can be summarized as follows:

• Zero-based budgeting allows reassessment of expenditures in each budget period. This makes it possible to adapt to changing working conditions and redistribute resources according to priorities. Flexible budgets help companies use resources most effectively to achieve goals.
• It allows enterprises to plan their activities more effectively. Each item of expenditure is evaluated in detail and organized according to priorities. This allows companies to direct resources to the right areas and supports the focus of the business on its strategic objectives.
• It offers companies the opportunity to identify and eliminate unnecessary or increasing costs. Past expenses are not automatically recognized and each item of expenditure must be justified. This, in turn, helps companies control costs and increase their profitability.
• Zero-based budgeting encourages companies to implement budgets in a more disciplined way. Every expenditure must be justified and approved. This ensures that extra-budgetary spending is kept under control and ensures commitment to budget objectives.

Benefits of Zero-Based Budgeting for Institutions

The zero-based budgeting method is a system that provides many benefits to institutions. Its main benefits can be summarized as follows:

• Zero-based budgeting helps organizations control costs more effectively. Unnecessary or increased costs are better defined and eliminated, as each expenditure must be justified and approved. This ensures that organizations achieve their budget goals, increasing their profitability.
• It allows resources to be managed more effectively. In each budget period, resources are reassessed and distributed according to priorities. In this way, organizations can use their resources in the most efficient way by focusing on their strategic objectives.
• It requires a detailed analysis of business processes. This allows businesses to review and improve their business processes. The efficiency of processes is increased, inefficiencies are identified and the overall performance of the enterprise is improved.
• It is an important tool for performance management. Each item of expenditure is evaluated in detail and its compliance with the objectives is measured. This ensures that institutions monitor their performance and take corrective measures when necessary. The performance management process contributes to the achievement of the organization's strategic objectives.
• Strengthens the decision-making process. Decisions are better evaluated and based on a more solid foundation, as each expenditure must be justified and approved. In this way, institutions can be made to make more rational and informed decisions.

Zero-based budgeting is an effective tool for organizations to control costs, manage resources, improve business processes, and improve performance.

‍