What Is Zero-Based Budgeting? | Benefits, Process and Examples

Budgeting is important for businesses (both small and large enterprise-level businesses). Usually, small businesses do the budgeting process in different ways – they update their budget by making minor changes to their existing budget for the previous year. If you want to learn about Zero based budgeting, go through this article here.

Although this might save them some time, this is not the most effective way of budgeting for a small business. But, Zero-based budgeting, on the other hand, can be a very effective way of budgeting for small businesses.

It helps identify, improve, or eliminate hidden and unnecessary costs. It also helps businesses control their expenses better, thereby helping them with high-profit initiatives. But what is zero-based budgeting? How does it work?

What Is Zero-Based Budgeting? 

Zero-based budgeting requires the expenses to be justified for each of the periods. The main catch here is to start your budgeting at zero, and you cannot use the previous year’s value as the basis of your budget. This budgeting process makes it necessary to justify the purpose of an asset in use. Thanks to the process, businesses can re-evaluate different areas while planning; they can also use the justification to shift their priorities from one area to another.

This budgeting process follows some steps as mentioned below –

1. Identify business goals.
2. Analyze and develop new processes to achieve business goals.
3. Find out new and different ways to fund business processes.
4. Prioritize your fund

Thanks to this budgeting process, businesses might also find that their budget fluctuates significantly in between periods. For example, the budget might be $50000 in one period, and in another period, it might be $45000.

When Should A Business Use a Zero-Based Budget?  

A zero-based budget is best for business owners who are busy or short-staffed. Businesses that cannot afford to make a budget every month or year can rely on a zero-based budget. Some businesses can also do a zero-based budget in some of the years while also maintaining a traditional budget in the meanwhile.

Benefits Of Zero Based Budget On Businesses  

Small businesses can manage and improve their targets using based on zero budgets. Here are some of the benefits of using the zero-based budget for small businesses –

Create Your First Budget

Create the first budget: the first benefit of a zero-based budget is its necessity. Startup businesses need to start their budget from zero. So, there is no way but to follow a zero-based budget in that case. Startups do not have a previous budget, so they need to start from zero. Small startups can really plan their way and shop from the most inexpensive vendors and run their business profitability.

Cost Saving

The second and another important aspect of the zero-based budget is its cost-effectiveness. This budgeting system allows small businesses to save their money butting identifying and cutting down on unnecessary expenses. Businesses can save money for the year by cutting down on expenses that are not generating any profit.

Identify The Passage Of Expenses

Thanks to the zero budgeting system, you will know where your money is spent. On a zero-based budget, managers have to mention the amount of money they need and where they want to use it.

Challenges Of Zero Based Budget

Yes, there are some benefits to using a zero-based budget. However, there are some challenges as well. Here are some of the challenges you need to be aware of –

1. First, the zero-based budget needs to be created from scratch. Hence, it is usually time-consuming. Traditional budgeting takes less time than zero-based budgeting takes.
2. This is an unintended challenge or limitation, but a zero-based budget offers temporary cost savings solutions. The cost-saving part does not have many prominent long-term effects.
3. It can also make businesses overlook some other areas that need attention. It may increase some key expenses for research and development. Also, some of the strategic projects for the long term might get overlooked.

How To Utilize Zero-Based Budget Effectively?

Here are some of the best practices you can follow to effectively use zero-based budgeting –

Take A Strategic Approach

First, you can work with the best business leaders and find out where your business is overspending. You can also relocate those resources and make strategic use of them.

Choose The Right Platform

Your business will need cloud-based planning and budgeting software for modern planning and budgeting. These platforms help you make the best decisions and recommend the best way forward. The best planning and budgeting platforms should allow you to handle things such as –

Planning intelligence & purpose-built capabilities for predictive planning, robust “what-if” scenario modeling, driver-based budgeting, sandboxing, budgeting (both top-down and bottom-up), and approvals and workflows as their best practices; and these features should be readily available.

Embrace Connected Planning

Businesses used to have complete planning that used to get followed throughout the work week or financial year. However, disruption is a constant companion for many businesses. This is why the constant need for change and adaptation to new changes is a must. Plans get created, but they get changed eventually.

Many successful CFOs are planning and partnering with marketing, sales, and HR teams to make more accurate decisions. They are using timely and accurate information to make connected enterprise planning. Embracing connected planning allows businesses of the new world to easily adapt to zero-based budgeting.

Bottom Line

Businesses usually cannot recognize some of the expenses they could cut back on. This happens when they keep using the same traditional budgeting system. In this case, they are basing their budget on the previous year’s budget. However, when using a zero-based budget, they can ensure that each of the dollars in the business budget is accounted for.

However, if you are using this budgeting system in your business, then make sure to evaluate both pros and cons. I hope that the information you were looking for was present in this article. In case you need any more assistance, please comment below.

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