What is Zero Budgeting (ZBB): Meaning, Process and Examples

What is a zero budget?

Let’s begin by exploring the meaning of the zero budget. Zero budget or ZBB is the budget with the reset button where it starts with zero after each period. Each new budget created starts from scratch and the budget is independent of the previous goals set by the company. It is one of the most sustainable cost saving methods when it is properly planned and implemented. Zero budgeting has been found to reduce SG&A costs anywhere from 10% to 25% within a year. Companies that have implemented ZBB correctly find they are more productive in the long run when they actually excavate and find cost drivers before embarking on the ZBB journey.

ZBB does not impose costs to be reduced significantly because cost reduction depends on the top-down objective which means that it varies from business to business. The common myth is that zero-based budgeting takes time to take effect and is very cumbersome. While it is true that the process induces effort, ZBB can take as little as one year to take effect. Zero budgeting involves building a culture of cost management, so it is not the responsibility of one individual. It makes cost management practices followed by all employees so that everyone is a part of reducing business costs. ZBB is structured and regulated.

What is the budget?

A budget is a plan that predicts the expenses, profits, and revenues of a business. For example, a company can have different budgets for production, division, capital expenditure, and sales. The budget is future oriented because it shows the activities that the company will undertake and the financial plan for doing them. Companies create a master budget that contains the key points of the different budgets. Separate budgets are created to specify the details of those particular budgets. The budget is reviewed and adjusted regularly to best reflect reality. Budget amounts are compared to actual amounts and the difference is known as variance.

Zero budget process

The zero-budgeting process diagram is as follows.

Step 1: Business Objective

When the new accounting period begins, the first step is to clarify and define your business goals. Is your main goal to reduce costs, increase profits, or both? Start with one action goal and then make sure the goal is measurable.

Step 2: Activities to achieve the goal

This zero-budget step includes the activities you need to do to achieve the business goals you set in step one. You need to take a closer look at how best to allocate resources to achieve the stated goals.

Step 3: Identify cost drivers

Next, you should determine the costs associated with the actions you need to perform to achieve business goals. Add the costs already associated with operating and maintaining your business if these are a necessary expense.

After the zero budget, you need to perform the tasks that you consider most important and follow the budget as you created it. After the period is over, you need to measure the real result with the expected results to determine if the goals have been achieved. The next budget period will start with zero again and the cycle will continue.

When do you use the zero budget?

Companies that struggle to manage their costs effectively can benefit from a zero budget. ZBB is a more comprehensive and rigorous form of budgeting that requires time to implement. Companies with a cost reduction target of 10 percent or less can benefit from this type of budget. It is also suitable for companies that want to meet the challenges posed by a zero-based budget. Zero budgeting requires training because it requires creating a culture of cost savings among employees. Businesses willing to put in the effort can consider using a zero-based budget as it is more likely to pay off in the long run.

Zero budgeting can be used by businesses of all sizes and all types because it can lead to significant savings over time. Business owners often mistakenly believe that ZBB is only for companies that are unable to grow. Companies can implement the zero growth budget as it can act as a growth booster. It does this by allocating unproductive costs to productive endeavors. Small businesses and growing companies can use the zero budget effectively to achieve better growth in the short term. It can also be used by companies that use traditional cost-cutting methods but want greater cost reduction.

Zero budget example

Zero-based budgeting is best explained with an example. Let’s say you run a beauty salon. You buy hair oils, creams, facial supplies, etc. for $20,000. When you sit down to create a budget, you will notice that you can make some products with natural ingredients, so now you only need to purchase $15,000 worth of products. This is the new expense budget. Then, you’ll realize you’ve left the lights on for too long. You can save on your electric bill by turning off the lights when not in use. This can save you an additional $500. You understand that disposable items that are cheaper and more economical can be used so you can save an extra $1000.

Zero budget vs zero budget. traditional budget

Here’s how a zero-based budget differs from a traditional budget.

Zero budget

traditional budget

It does not take into account budgets created in the previous year or previous years. He always starts budgeting from scratch and is zero. This always means looking at budgeting with a fresh outlook and no assumptions as well as goals from previous years.

It involves adjusting budgets made in the past by making adjustments so that they are close to the real expenses that occur in the business. Traditional budgeting always takes into account what was done before and how it was done.

Zero budgeting requires justification of expenditures. Every dollar counts in this type of budget, making it more comprehensive and realistic. It involves a high view of different cost drivers which makes this type of budgeting a more sustainable approach to cost reduction.

Traditional budgeting takes a permissive approach and is primarily used to increase revenue rather than looking for ways to reduce costs from individual units. It is not specific about the calculation of each dollar. It implies an increase in expenditure or a reduction in cost, but not to the exact level of zero budgeting.

It requires more effort and time because everything is analyzed in depth before preparing the budget. Furthermore, training is required to ensure that the budget is properly implemented.

It is generalized and requires less effort and time to create when compared to zero-based budgeting. Traditional budget execution does not spur effort in comparison, allowing every type of business to try it out with ease.

Zero budget spending decisions are taken by the managers. Expenditure depends on what activities are performed and how they should be implemented in order to be cost-effective. The focus is more on optimizing costs rather than just increasing revenue.

Traditional spending decisions are taken by the top management of the company. Leaning more towards how business activities are performed. It does not go as deep as activities that should be given priority.

It is best to associate cost reduction with groups of businesses. This makes it more straightforward to follow and implement. It divides the activities according to the department that needs to be done etc.

It’s more about identifying the change that applies to everyone like increasing spending by 1%. This general nature does not specify in detail how activities are linked to budgets, making it confusing to implement.

How does accounting software help in budget management?

A lazy approach to budgeting will not suffice because a budget can serve as an outline and a solid plan to steer your business in the right direction. Accounting software enables companies to better manage their budgets and allocate funds to maximize cost savings. TallyPrime is an accounting software solution that enables you to create budgets for groups, cost centers and ledger accounts. You can create a budget hierarchy with a master budget and sub budgets under it.

Budgeting in TallyPrime

You can also generate accurate variance reports that let you see how close your budget or actual amounts are. Accounting software makes budget execution easy.

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