Question

In the required reading article for this module, Zero-Based Budgeting, the author, J. Stephen McNally, renders both positive and negative support for why a company might want to implement the concept over a traditional budgeting process. It can be a radical change for a company used to doing things "same as last year." If you were in charge of the budgeting process for a company, would you implement zero-based budgeting for a year to try out the concept? What things about the corporate environment did you take into consideration when making that decision?

Answer 1

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses starts with a ZERO BASE and must be justified for each new period.

Building a budget from zero might seem like a tedious process, but it can help to make the best decisions for your company in the long run, especially for lower growth organizations that are interested in cutting costs. This process forces company to justify all operating expenses and consider which areas of the company are generating revenues.

The major advantages of zero-based budgeting are

• flexible budgets
• focused operations
• lower costs
• disciplined execution

However we must also consider the disadvantages that comes with it. Some of them are its resource intensiveness, and bias towards short-term planning.

The things to take into consideration –

• Are the current activities efficient and effective or new alternative ways can help being optimal.
• If the cost in terms of time and effort to draw up a budget from scratch rather than modify an existing budget justify the benefits derived from it.
• Does all accounts need ZBB or only few accounts can be done on basis of ZBB and few on basis of traditional budgeting.