Wednesday, July 1, 2015

Zero-based budgeting

Zero-based budgeting îs approach to planning & decision-making which reverses working process of traditional budgeting, In traditional incremental budgeting, departmental managers justify only variances versus past years, based on assumption that "baseline" îs automatically approved, By contrast, în zero-based budgeting, every line item of budget must be approved, rather than only changes, During review process, no reference îs made to previous level of expenditure, Zero-based budgeting requires budget request be re-evaluated thoroughly, starting from zero-base, This process îs independent on whether total budget - specific line items are increasing - decreasing,

The term "zero-based budgeting" îs sometimes used în personal finance to describe "zero-sum budgeting", practice of budgeting every dollar of income received, & then adjusting some part of budget downward for every other part that needs to be adjusted upward,

Zero based budgeting also refers to identification of task - tasks & then funding resources to complete task independent of current resourcing,


Advantages

Efficient allocation of resources, as it îs based on needs & benefits rather than history,
Drives managers to find cost effective ways to improve operations,
Detects inflated budgets,
Increases staff motivation by providing greater initiative & responsibility în decision-making,
Increases communication & coordination within organization,
Identifies & eliminates wasteful & obsolete operations,
Identifies opportunities for outsourcing,
Forces cost centers to identify their mission & their relationship to overall goals,
It helps în identifying areas of wasteful expenditure and, if desired, it can also be used for suggesting alternative courses of action,

Disadvantages

More time-consuming than incremental budgeting,
Justifying every line item can be problematic for departments with intangible outputs,
Requires specific training, due to increased complexity vs, incremental budgeting,
In large organization, amount of information backing up budgeting process may be overwhelming,

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