Zero Based Budgeting is a specific budget calculating and preparing process in which all types of the expenditures of a country or institute must be justified for every new period (upcoming year or session). During this budgeting, every function of a company or organization is critically analyzed to predefine and calculate the costs and needs which that organization would require in an upcoming year. In fact, zero based budgeting has been an excellent financial practical management tool to evaluate and justify all overheads which an organization would require a specific period of time.
History of ZBB:
When you go beyond the history, you will come across some important and interesting facts about the Zero Based Budgeting (ZBB). In general, this budgeting method was discovered, introduced and presented by an accounting manager at Texas Instruments Mr. Peter Pyhrr in 1970. It was very strange and doubtful strategy ever in the financial market, but later on, there were many private companies and organizations that used ZBB and achieved their goals. Fundamentally, it was just to minimize as well as control the budget deficit and estimate overall expenses of an organization. This budgeting method provided a key support to the industries, small and large organizations in the USA.
Misconceptions about ZBB:
Though zero based budgeting has been an extremely supportive, effective, useful and beneficial financial management strategy to calculate the budget of next period, there are many misperceptions of the experts and accountants for this financial tool. Some misperceptions for ZBB are;
- ZBB idea offers to calculate your budget just from the zero sum.
- Using this budgeting method will cut your budget into the ribbons.
- Zero budgeting can restrict a business or company to execute multiple business activities and stop its normal growth.
- Unfortunately, the zero budgeting process considers only the major costs like general, administrative and general expenses.
- ZBB is not a perfect financial tool or strategy for the growth orient organizations or businesses.
Advantages of ZBB:
Surely, zero based budgeting comes with several important and inspiring features and unlimited advantages. This budgeting method became extremely popular in the fall of the 20th century in the USA. Later on, many international companies and industries adopted ZBB strategy to calculate and set their annual budget and they achieved their desired financial and growth goals easily and quickly. The most common and popular benefits of ZBB are;
- It drives the best communication and coordination among various departments of an organization.
- ZBB always offers you the unbiased, accurate and greatly reliable budget calculation.
- It is necessary to prevent the budget deficit and ZBB has been a wonderful financial strategy to minimize wasteful spending and overheads to utilize the budget in only productive and profitable activities.
- ZBB will give you the best efficiency and financial performance in the current year with compared to the past periods.
Areas of Application:
Detailed analysis of ZBB (Zero-Based Budgeting) will let you know its accuracy rate, efficiency, and usefulness in the business. Basically, there are plenty of departments, industries, and businesses where you can use ZBB to calculate, justify and make the best budget for better financial outcomes and good earning. However, the public and government sectors in the USA and many other leveraged countries have been using ZBB since the end of the 20th century. All large organizations and companies can get benefitted largely by using this budgeting strategy.
Steps Involved in Making ZBB:
You need just the sound knowledge and experience about the accounting and financial matters for making zero based budgeting. This is not a complicated budgeting method, but it needs good skills, sound experience, and budgeting techniques. The following steps are directly involved in making a budget by using the ZBB financial strategy for any business or organization.
- Enlist all of the expenses in all forms of the current month or year which you will consider as the base period
- Justify all the overheads and costs of every month you will need to pay
- Find out a net income by subtracting your expenses from your earning or income
- Calculate the budget for a specific upcoming session or period and use it to run your business or organization etc.