Zero-based budgeting is a detailed assessment of all expenses starting from a "zero base". Increasing in popularity it differs from traditional cost budgeting methods by not referring to previous period figures and by requiring managers to justify all expenditure, old and new. This style of budgeting is time-consuming, as all expenses must be analysed from scratch rather than given an incremental percentage increase or decrease depending on previous period analysis.
Pros and cons of Zero-based budgeting
One of the primary advantages of zero-based budgeting is the visibility of their cost structures it offers to businesses. Managers need to justify every expense within each set period, a process which can ultimately result in changing the whole culture of how cost management is viewed in a company. As businesses look to increase productivity and reduce costs worldwide, accountability at all levels of a company can be improved as every cost is analysed to assess if it is essential to the output and performance of the business.
However, the detailed nature of the method makes it more time-consuming then traditional cost budgeting. A criticism of zero-budgeting is that the savings do not always justify the cost of the overhaul, though this will be dependent on each company's circumstances. There is also a worry, zero-based budgeting promotes short term thinking by focusing resources to parts of the company more likely to generate larger profits during the coming year.
Research illustrates companies report an average cumulative cost saving of 15% with almost all citing profitability as a reason for implementing the system. While most businesses apply zero-budgeting for general administration expenses, this drops to 52% for sales and marketing. Speed of implementation is also evenly split with 43% rolling it out completely and 45% of responding companies implementing it via a staggered roll-out.