Zero-Based Budgeting

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Start from scratch

Every action taken by a business is preceded by a specific process: planning. As soon as a plan is expressed in terms of finances and financial goals, it is referred to as budgeting and moves to the next stage. Zero-base budgeting is a method that starts from zero for each budgeting period. This approach calls for justification of all expenses instead of only the new ones.

What is Zero-Based Budgeting?

Zero-based budgeting is a budgeting method in which all expenditures for each new period must be justified. The zero-based budgeting process starts with a “zero base”, and each function within an organization is analyzed for its needs and costs.

Key Features of Zero-Based Budgeting

In the planning of zero-based budgeting, each planning period begins at zero. This enables analytical re-planning.

In most companies, each business unit creates its own budget plan based on requirements and presents to management. As a result, no overall budget is created initially. Instead, different budgets are simulated. Overhead costs are redistributed with each planning period.

Steps to successful budgeting

The goal of zero-based budgeting is to reduce overhead costs and redistribute them in line with operational and strategic goals. The process is divided into nine stages:

  • Planning and definition of the budgeting targets and available resources by the company’s management
  • Formation of business units (e.g. divisions and teams with corresponding cost centers)
  • Defining performance levels (e.g. quality and quantity of work results for each business unit)
  • Formulation of alternatives for each stage (e.g. to save costs per cost center)
  • Selection of the most cost-effective alternative (i.e. certain decisions are favored)
  • Ranking the alternatives (i.e. including the rejected activities)
  • Budget slice (i.e. distribution of available funds among)
  • Approval of the selected decision packages (e.g. with the assistance of finance)
  • Implementation of the defined measures in budgets by the finance department

Advantages of Zero-Based Budgeting

  • Saving of resources
  • A fair distribution of limited resources
  • Increased flexibility
  • Improved alignment with corporate goals
  • A careful review of overhead
  • Transparency of the budgeting process and the system understanding

Reach your goal faster with cloud-based systems

With cloud-based real-time financial systems, today’s businesses can take a modern approach to zero-based budgeting and compile the necessary data for such a budgeting plan with a single click. It makes it easier to assign responsibilities for budgeting.

Even if the data comes from different departments or business units, it can be analyzed in seconds. Cloud-based financial systems, for example, enable operational business units and individual cost centers to participate in zero-based budgeting together with the finance department. Budgeting, planning, and forecasting across the entire organization becomes seamless.

Properly executed, the planning of zero-based budgeting can prove to be a valuable strategic step that helps companies make smarter decisions.

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