How can you compare zero-based budgeting to traditional budgeting?

1 What is zero-based budgeting?

Zero-based budgeting (ZBB) is a method of budgeting and forecasting that assumes that every expense is zero at the beginning of the budgeting period and needs to be approved and allocated based on its contribution to the business objectives. ZBB requires a detailed analysis of the activities, processes, and outcomes of each department or function and a prioritization of the most critical and efficient ones. ZBB aims to eliminate waste, improve performance, and align the budget with the strategic vision of the business.

2 What is traditional budgeting?

Traditional budgeting (TB) is a method of budgeting and forecasting that uses the previous year's budget as a starting point and adjusts it for expected changes in revenue, costs, and other factors. TB relies on historical data and trends to project the future performance of the business. TB is simpler and faster than ZBB, as it does not require a thorough review of every expense and activity. TB also provides continuity and stability for the business, as it maintains a consistent level of spending and resource allocation.

3 What are the benefits of zero-based budgeting?

ZBB can be a great asset to businesses that want to optimize their budgeting and forecasting processes. It encourages accountability, transparency, and innovation by requiring that every expense and activity is justified and linked to the business goals. Furthermore, ZBB helps to identify and eliminate unnecessary, redundant, or inefficient expenses and activities that do not add value to the business or the customers. Additionally, it allows for more flexibility and adaptability as the budget can be adjusted to reflect the changing needs and priorities of the business and the market. Ultimately, ZBB can lead to significant cost savings, improved profitability, and enhanced competitive advantage for the business.

4 What are the challenges of zero-based budgeting?

Zero-based budgeting (ZBB) has some challenges and drawbacks to consider before implementation. It requires a lot of time, effort, and resources to conduct a comprehensive analysis of every expense and activity and to justify and prioritize them. Additionally, ZBB can create conflict and resistance among managers and employees who may feel threatened by the constant scrutiny and evaluation. It can also reduce the flexibility and responsiveness of the business, potentially limiting quick decision-making or taking advantage of new opportunities. Furthermore, it can be difficult to apply to some areas of the business, such as research and development or marketing, that may have intangible or long-term benefits that are hard to measure.

5 How to choose between zero-based budgeting and traditional budgeting?

There is no definitive answer to which method of budgeting and forecasting is better for every business. The choice depends on several factors, such as the size, complexity, and industry of the business, the availability and quality of data, the level of uncertainty and volatility in the market, the goals and culture of the business, and the preferences and skills of the managers and employees. Some businesses may use a combination of both methods, applying ZBB to some areas or functions and TB to others, or using ZBB periodically and TB annually. The key is to find the balance between efficiency and effectiveness, between cost reduction and value creation, and between planning and execution.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?