Question

The recent COVID-19 outbreak has business owners and managerial accountants rethinking how to manage company spending and income. They are realizing that creating and sticking to a budget is more important than ever. Zero-based budgeting gives every dollar a purpose and avoids wasting money which is helpful when a company’s finances are fragile.

In your initial discussion posting include the following about zero-based budgeting:

• Discuss how zero-based budgeting is used to withstand volatility as businesses experience COVID-19.
• How will zero-based budgeting withstand disruptions in production and revenues?
• Why does zero-based budgeting lead to more accurate forecasting?

Answer 1

Zero based budgeting means preparation of budgets from the scratch without any pre-determined base. Under it, justification needs to be given for every activity with a clear explanation of the revenue that every cost will generate for the company. It assumes no pre-committed expenses and carry forward balances. It focuses on the identification of a task and its expenses' funding without considering the structure of the current expenditure. It leads to more accurate forecasting because it does not make any arbitrary changes to the budgets of previous year but provides a clear picture of the costs involved against the desired performance by calculating the expenses for the new period on the basis of actual expenses which are to be incurred and not on differential basis that involves alteration in expenses incurred after considering changes in the operational activity. It has the ability to withstand volatility during the tough period of Covid-19, as it does not rely on historical numbers but looks at the numbers in actual. It identifies opportunities and different ways of cost effectiveness by eliminating all unproductive and redundant activities, which becomes very crucial and critical for businesses during this horrible phase of Covid-19.