Zero-Based Budgeting (ZBB)
Candlefocus EditorBasically, zero-based budgeting takes a fresh start with every budgeting cycle. Companies and organizations determine their expenses each period based on the defined activities their budget covers. Rather than using a standard base funding that is allocated to various departments and activities, a new budget starts with a zero base and every expenditure is justified. This contrasts to traditional budgeting which builds upon the current budget without being tied to past allocations or justifying current expenses.
At its core, zero-based budgeting is about optimization. Companies use it to make sure that the funding for a division or department is being used on the most effective items. Individuals and families can use the same approach to decide how to allocate resources more efficiently.
To create a zero-based budget, first start by gathering data about all income and total expenses. This should include all discretionary spending. From there, create a plan for how to allocate spending in order to meet basic needs. It’s important to remember that there must be enough money to pay for both essential items and wants throughout the period. With zero-based budgeting, each expense must be justified in order to make sure it serves the best purpose.
In addition to creating budgets, zero-based budgeting is used by managers to tackle costs reduction. It can help identify areas in a budget that can be trimmed or require further investigation to see where cost savings can be achieved. As a result, this can lead to smarter financial decisions preventative measures, and more informed budgeting.
Zero-based budgeting can be a powerful tool for planning and managing finances. By starting with a zero-base and justifying costs, it ensures that funds are allocated wisely. It can help individuals and families, as well as businesses, achieve financial control, optimize spending, and identify wasteful expenses.