How does the budgeting term “zero-based budgeting” differ from traditional budgeting methods?
What are the key differences between the budgeting method of “zero-based budgeting” and traditional budgeting methods such as incremental budgeting?
Answer ( 1 )
Zero-based budgeting (ZBB) is a budgeting method in which all expenses must be justified for each new period, rather than using the previous period’s budget as a starting point. This is in contrast to traditional budgeting methods, such as incremental budgeting, in which the current year’s budget is based on the previous year’s budget, with adjustments made for inflation and other expected changes.
One of the key differences between ZBB and traditional budgeting methods is the level of detail and scrutiny applied to expenses. In ZBB, all expenses are examined in detail, with the goal of identifying and eliminating any unnecessary expenses. This can lead to significant cost savings for the organization.
Another difference is that ZBB is more forward-looking and proactive, as it requires departments and managers to think about the future and identify new opportunities for growth and efficiency. This can lead to more innovative and strategic decision making.
Furthermore, ZBB allows for more flexibility and adaptability to changing market conditions and unexpected events. It encourages managers to think about the best use of resources, rather than assuming that last year’s budget is the best starting point.
In summary, ZBB is a more detailed and forward-looking budgeting method that encourages managers to think strategically and proactively, while traditional budgeting methods tend to be more reactive and incremental. It also allows for more flexibility and adaptability to changing market conditions and unexpected events.