Zero-Based Budgeting (ZBB) is a budgeting approach where every expense must be justified for each new period, starting from a "zero base." Unlike traditional budgeting, which typically adjusts previous years' budgets by a percentage, ZBB requires that all expenses be evaluated and justified as if they were new.
Key Features of Zero-Based Budgeting:
Justification of Expenses: Every department or unit must justify all its expenditures and operations for the budget period, regardless of previous budgets. Each activity or expense is assessed based on its necessity, relevance, and contribution to the organization's goals.
Focus on Alternatives: ZBB encourages evaluating multiple alternatives for achieving objectives, promoting cost-effective decision-making. This ensures that resources are allocated to activities that provide the most value.
Priority Setting: The process involves ranking programs and expenditures in order of priority. This allows organizations to allocate resources more strategically and focus on high-priority areas.
Elimination of Waste: By scrutinizing all expenditures, ZBB identifies and eliminates wasteful or redundant activities, reducing unnecessary spending and promoting efficiency.
Benefits of Zero-Based Budgeting:
- Efficiency: Promotes efficient use of resources by ensuring that all spending aligns with organizational goals.
- Cost Reduction: Helps identify and eliminate unnecessary expenses, leading to cost savings.
- Accountability: Increases accountability by requiring managers to justify every expense.
However, ZBB is also time-consuming and requires substantial effort in analysis and documentation. It is most effective in organizations willing to invest time and resources into rigorous budget planning.
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