Understanding Zero Based Budgeting Works

It is vital that businessmen understand where they are with the budget and there are so many different ways to run an account department. One that has proved to be exceptional is zero based budgeting. With this system, all expenses should be justified as each new period starts. As the name suggests, the starting point is zero, and all areas of the company will be scrutinized before the decision as to whether proceed on is made.

Once the decisions have been made, budgets are put in place and are a true reflection of the amount of money needed, and will not be determined by previous budgets. The advantage of this system is that it ensures that the most important projects are funded and the costs can be checked against the last few months’ expenditure as well as up-coming events. It is a suitable way to budget when you are planning over several years as it can be implemented as a rolling process. It will be best to carry out regular reviews in some of the more important areas, especially, if directors and shareholders expect regular up-dates.

Ways it Can Reduce Costs

Costs can be reduced in many ways, and while some may not be massive savings, they all add up and that is important.

  • Across the board rises in costs can be picked up and avoided.
  • Across the board drops in cost can be picked up.

While both issues are different sides of the same coin, it can be a double barrel assault on costs before they get out of control. There is a slight downside to this and that is the fact that it is not a time efficient system.

When it comes to comparing zero based budgeting to more traditional forms of budgeting there are some major differences.

  • There is no need for an automatic update on the previous budget – any update has to come with the proof that it is needed.
  • Traditional budgeting only takes into account more recent expenses and analysis them, while zero based budgeting starts from the beginning and insists that previous and ongoing expenses are assessed as well as all the new ones.
  • Managers are expected to give justification for their expenditure and to work towards minimising costs as well as increasing profits.

Example

If an organization discovered that items they had outsourced were increasing by a considerable amount each year, they may decide to bring it in house. Traditional budgets allow an increase and do not always know why it has to happen – they will not have identified the area of increased expenditure. The alternative however is more detailed. It must be a significant saving to make the change worthwhile.

Advantages of Zero Based Budgeting

There are a few advantages of and some are much more important than others. They include

  • Low costs – continually monitoring prices ensures that this happens.
  • Discipline – it can be easy to let things slip especially when there is a deadline. That really would be a case of short term gain then long-term pain.

Disadvantages

  • It takes a lot effort to run and managers should not take their eyes off the ball.
  • It can be used to the advantage of some to aid their own department
  • Long term planning will be neglected in favour of short term planning.

It may not be the way that everyone wants to see a company operate, but it cannot be denied that it keeps people on their toes and aware of every penny that they spend. Any problems should be picked up right away. Using Anaplan software will be the perfect way to get your budge sorted out and your company heading in the right direction.…