Advantages And Disadvantages of Zero-based budgeting: Many people have been sceptical of a well-known budgeting technique known as zero-based budgeting. Some argue that it is impossible to make something exist without first defining it, whereas others insist that zero-based budgeting allows more flexibility in creating budgets. The truth is, there are many different benefits to using zero-based budgeting, some of which might be even more important than saving time or money. However, it is not without its drawbacks and limitations. In this article, we shall explore some of the advantages and disadvantages of Zero-based budgeting.
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- Advantages of Zero-based budgeting
- Disadvantages of Zero-based budgeting
- Comparison Table for Advantages and Disadvantages of Zero-based budgeting
- Conclusion on Zero-based budgeting – Advantages And Disadvantages
- FAQs on Advantages And Disadvantages of Zero-based Budgeting
Advantages of Zero-based budgeting
The idea of zero-based budgeting emerged in the late 1960s when an accountant by the name of Pete Pyhrr developed this technique while he was working for Texas Instruments. Today, many Fortune 500 companies have adopted this technique due to the many advantages it offers:
- Justify All Operating Expenses – It’s been said that with zero-based budgeting, one must make all operating expenses justifiable. If an expense doesn’t make sense in the current budget, it should not be included. For example, if your company has 200 employees and you find that the acting manager of finance is overspending by 10%, you can investigate the cause of the problem and fix it. Zero-based budgeting also helps to identify what expenses are necessary and what are not.
- Legacy Expenses are kept in check – One of the most important things that zero-based budgeting does is to keep legacy expenses in check. Legacy expenses are expenses that have already been incurred. They can be for the current year, or for a previous year. At the start of every new year, a company should know what their legacy expense is and apply it against their budget. It allows businesses to never get too far into debt, which can lead to bankruptcy.
- Promotes Business Process Management to be Optimised – When business processes are not optimised, the results are less than desirable. If a manager is unable to provide clear communication of goals and progress related to these goals, then it is more likely that the business will fail. With zero-based budgeting, there can be optimal communication among managers and staff and more efficient utilisation of resources.
- Promotes Transparency – This type of budget can help promote transparency because all previous years’ spending is on the table, and also helps balance out the current year’s budget.
- Beneficial for Strategic growth – Zero-based budgeting is beneficial for a business’s growth as it helps them to determine how much they need to spend in order to reach their goals. It is also beneficial for strategic planning. Businesses should first focus on what they need and then work backwards from their goal.
Disadvantages of Zero-based budgeting
While we saw zero-based budgeting has benefits, it is not without its disadvantages.
- Might be harmful in the long run – Critics of Zero-based budgeting argue that it can be harmful in the long run because it cuts off other avenues that are paramount for an organisation’s growth, such as research and development or employee welfare.
- Takes a long time to analyse and implement – With the introduction of zero-based budgeting, it takes a lot more time and effort to closely review and justify every budget element. It also requires collaboration between departments to make sure the budget is flexible enough to meet the needs of all the employees.
- Risk of fraud and manipulation – The risk of manipulation and exploitation is a downside to zero-based budgeting. It lets managers decide how much of the company’s budget they want to spend. In some cases, the manager’s action may not align with the company’s allocated budget.
Comparison Table for Advantages and Disadvantages of Zero-based budgeting
Following are the advantages and disadvantages of Zero-based budgeting:
- Justify All Operating Expenses
- Legacy Expenses are kept in check
- Promotes the optimisation of Business Process Management
- Promotes Transparency
- Beneficial for Strategic growth
- Might be harmful for the company in the long run
- Takes a long time to analyse and implement
- Risk of fraud and manipulation
Conclusion on Zero-based budgeting – Advantages And Disadvantages
This business term means that every dollar the company spends must be justified. This helps businesses keep track of where the money is going and prevent overspending. There are many advantages to zero-based budgeting. It allows a company’s employees and managers to clearly communicate with each other about what should be done and how much money is needed for specific projects. This system also helps the company avoid waste and make more efficient use of its resources. However, this budgeting technique is also very resource intensive, which means it is tedious to evaluate each and every expense, no matter how small.
FAQs on Advantages And Disadvantages of Zero-based Budgeting
What is Zero-based budgeting?
Budgeting is an important aspect of the financial management process. Budgeting is used in all aspects of an organisation. However, there are different types of budgeting processes. Zero-based budgeting is one type that has been around for many decades and was first used by consumer goods companies such as Procter & Gamble, Kraft Heinz Co., Unilever and Mondelez International Inc. This type of budgeting has become more popular over time because it allows for a fresh start every year, which helps to keep budgets on track with the current business needs.
What are the advantages and disadvantages of Zero-based budgeting?
Zero-based budgeting is one way for companies to make smart decisions about their spending and make sure that there isn’t any waste. However, many people have criticised this technique for being too risky. They say that by taking a strict approach to budgeting, companies might risk not having enough money for certain important projects or people might be laid off due to lack of funding.
Why is Zero-based budgeting important?
Budgeting is often an important aspect of any organisation or company. It is the process of planning, preparing, and controlling expenses in order to achieve stated objectives. Budgeting can be done on a monthly or yearly basis. Zero-based budgeting takes this concept one step further. With zero-based budgeting, every dollar spent in the previous budget period has to be accounted for before new spending can be approved. This helps prevent unnecessary overspending and the potential for funds being wasted.