In zero-based budgeting (ZBB), you must justify every naira spent.
If the justification isn’t strong enough, your request won’t be funded by management; if it is strong enough and approved by management, then you can plan for these funds in future iterations of your project plan.
In contrast, traditional budgeting involves starting with the previous year’s numbers and then making adjustments for changes in revenue and expenses.
Advantages of using zero-based budgeting
The process can be time-consuming and daunting at first; however, when done correctly, ZBB has many advantages over traditional approaches.
- Determines the cost of every single item or service in your business and compares it with previous years. This will help you determine whether the costs you have incurred are reasonable or not. This helps you identify areas where costs can be reduced or eliminated entirely.
- Takes a fresh look at how your company spends money. By reviewing each line item on your spreadsheet individually, rather than as a whole category (which is what happens in most traditional spreadsheets), it becomes much easier for managers to identify unnecessary expenses and reduce them accordingly.
- Creates a standardized system for tracking expenses throughout the year so that everyone involved knows exactly how much money has been spent on each project at any given time. This eliminates confusion about spending levels among employees who may not know about all projects currently underway within their departments.
- Allows for better financial forecasting because there are more accurate cost estimates based on current conditions rather than historical ones.
- Helps prevent overspending by managers who have budgetary authority.
Zero-based budgeting holds managers accountable to justify every expense.
Bottom line
Zero-based budgeting (ZBB) has the potential to improve accountability in the workplace.
ZBB helps organizations develop more efficient and effective budgets by asking managers to justify every expense on a project, rather than simply assuming that past costs are indicative of future spending needs.
Apply zero-based budgeting to your own finances. You can use it to better manage your money.
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