Zero-Based Budgeting

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Zero-Based Budgeting

The roots of Zero-based budgeting can be traced to 1970s.  In ZBB, approval is required for all items to be budgeted for. Since approval is required for all budget items, this means that everything starts from zero-base. Fresh decisions have to be made every financial year.

Pete Pyhrr, the then accounting manager at Texas Instruments introduced the Zero Based Budgeting. He realized that specific budget items are allocated money every year without checking whether that item is real required.

After making this discovery, he asked Georgia governor Jimmy Carter to allow him to manage the state budget. He subsequently authored a guide titled: “Zero Based Budgeting: A practical Management Tool for Evaluating Expenses.”
Zero-Based Budgeting is a process that complements the existing methods for planning and budgeting process. This is an efficient method of utilizing resources.

Many people have misconceptions that zero-based budgeting can cut a budget into small ribbons. That is not the case because everything depends on what the firm or government body wants to achieve.

Analysts have observed that to implement a Zero-based budget requires a team to handle the transition because the process can slow down activities.

Zero based budgeting is universal and can be applied on any type of cost. This method of budgeting has numerous advantages such as:

  1. ZBB promotes good communication and coordination within departments because all employees are engaged in decision-making.
  2. It promotes accuracy in all departments since companies or bodies are required to evaluate all departments.
  3. ZBB reduces wastage during expenditure.

There are a number of disadvantages associated with Zero Based Advantage. One, the method requires a lot of time, analysis and effort to implement as a result of bureaucracy. The result can led to being counter-productive as departments try to cut costs.

Second, Zero Based Budgeting can lead to corruption because shrewd departmental managers may present fake figures to convince management to allocate more resources to them.

Third, Zero Based Budgeting requires extra training for managers. There is no shortcut in understanding how zero-based budgeting works.

Finally, slow rate of response will have an impact on the effectiveness of implementing the entire process.

ZERO-BASED BUDGETING
ZERO-BASED BUDGETING

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Editor-in-Chief

Geoffrey Kerosi is a prolific economics writer and an avid reader in economics, finance, business, politics and technology.

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