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Zero-based budgeting

Author: Jim Riley  Last updated: Sunday 23 September, 2012

Zero based budget

• Start each budget period afresh-not based on historical data

• Budgets are zero unless managers make the case for resources-the relevant manager must justify the whole of the budget allocation

• It means that each activity is questioned as if it were new before any resources are allocated to it.

• Each plan of action has to be justified in terms of total cost involved and total benefit to accrue, with no reference to past activities.

• Zero based budgets are designed to prevent budgets creeping up each year with inflation

Advantages of ZBB

• Forces budget setters to examine every item.

• Allocation of resources linked to results and needs.

• Develops a questioning attitude.

• Wastage and budget slack should be eliminated.

• Prevents creeping budgets based on previous year’s figures with an added on percentage.

• Encourages managers to look for alternatives.

Disadvantages of ZBB

• It a complex time consuming process

• Short term benefits may be emphasised to the detriment of long term planning

• Affected by internal politics - can result in annual conflicts over budget allocation

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