Zero Based Budgeting as an Alternative to Traditional Budgeting
Budgeting is a wise idea to preserve dollars and make money work more effectively. There are alternatives to traditional budgeting planning and decision making however. With zero based budgeting, it reverses the budgeting process by providing an assumed baseline in order to meet budget guidelines. This zero level means that each change needs to be preapproved rather than looking at the budget line.
The History of Zero Based Budgets
The terminology was originally introduced in 1970 by Peter A. Phyrr in the Harvard Business Review. However, zero based budgeting gained popularity in the 1970s when Jimmy Carter announced the idea of zero-based budgeting to the federal government. While it failed in the government at large due to the high requirements for development and implementation, it was largely considered a success in Congress in 1977. After this it became used more commonly for business and personal budgeting as well.
Why Zero Based Budgets are Used
Zero based budgeting allows resources to be used based on needs rather than the traditional model of history. This in turn helps employees and managers to become more efficient and search for ways to improve their operating procedures instead of relying on funding based on previous performance. This also helps to improve corporate communication and employee motivation by providing incentive based financing. In addition, it can aid in finding areas of the business that are expensive and indicate more cost effective ways of dealing with the problem.
Reasons Zero Based Budgets are Limited
It can cost more money to implement zero based budgeting though. This is due to the time consumption that can be created by justifying each item. In departments that do not provide a specific product, it can also be difficult to define a specific cost analysis. Because this type of budgeting is less common than traditional budgeting, employees will also need to be trained on how to keep track of expenditures and in a larger organization this may become an impossible task.
How to Create a Zero Based Budget
To create zero based budgeting, it is important to list the income and then allocate the income to expenses. This should include any fluid expenses. The income should be equal to any expenses including any savings. Each month as the spending data changes, the budgeting should be adjusted. By forcing monetary business expenditures to be ranked by priority, this helps to determine how budgeting resources should be properly allocated.
While it may take a lot of time, effort and money to create a zero based budget, it is possible to use this systematic approach to develop a better method of organizing financial needs. When combined with other budgeting techniques, it can even help to justify new budgets and help with fiscal responsibility. It has been found that businesses and governmental agencies that adopt this practice generally report an improved financial savings, an improvement in the services that are offered or both.