how zero based budgeting zbb works
zbb allows top level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization costs can then be first grouped and then measured against previous results and current expectations zero based budgeting can be a rolling process done over several years with a few functional areas reviewed by managers or group leaders at a time because of its detail oriented nature it can help lower costs by avoiding blanket increases or decreases to a prior period s budget but it s a time consuming process that takes much longer than traditional cost based budgeting 1the practice favors areas that achieve direct revenues or production because their contributions are more easily justifiable than in departments such as client service and research and development zero based budgeting is primarily used in business but it can be used by individuals and families too zero based budgeting vs traditional budgetingtraditional budgeting calls for incremental increases over previous budgets such as a 2 increase in spending zero based budgeting requires a justification of both old and new expenses traditional budgeting also only analyzes new expenditures zbb starts from zero and calls for a justification of old recurring expenses in addition to new expenditures zero based budgeting aims to put the onus on managers to justify expenses it drives value for an organization by optimizing costs not just revenue example of zero based budgetingsuppose a construction equipment company implements a zero based budgeting process calling for closer scrutiny of manufacturing department expenses the company notices that the cost of certain parts used in its final products and outsourced to another manufacturer increases by 5 every year the company can manufacture those parts in house using its workers it finds after weighing the positives and negatives of in house manufacturing that it can make the parts cheaper than the outside supplier the company can identify a situation in which it can decide to make the part itself or buy the part from the external supplier for its end products instead of blindly increasing the budget by a certain percentage and masking the cost increase traditional budgeting may not allow cost drivers within departments to be identified but zero based budgeting is a more granular process that aims to identify and justify expenditures zero based budgeting is also more involved however so the costs of the process itself must be weighed against the savings it might identify 