Define: Zero-Based Budgeting

UK Accounting Glossary

Definition: Zero-Based Budgeting

Quick Summary

A budget approach where each expenditure item must be justified for each new budget period.

What is the dictionary definition of Zero-Based Budgeting?

Dictionary Definition

A Zero-base Budget (ZBB) is a cash-flow budget in which the manager responsible for it’s preparation is required to prepare and justify the budgeted expenditure from a zero base – This means assuming that there is no prior commitment to allocate any resources on any activity.

Full Definition

Rather than the previous year’s budget being the starting point for the next budget, a zero-based budget assumes no activities: everything in the budget must be justified.

Zero-Based Budgeting FAQ's

How is zero based budgeting implemented?

Businesses can develop or modify their own unique approaches to Zero Based Budgeting; the following five steps can provide a baseline for implementation.

  1. Start. Begin at ground zero.
  2. Evaluate. Evaluate every cost area.
  3. Justify. Account for all components of the budget.
  4. Streamline.
  5. Execute.
Does zero based budgeting work?

In zerobased budgeting, your income minus your expenditures should equal zero. The zerobased budgeting method encourages you to use every penny of your monthly income — but that doesn’t mean blowing it on a shopping spree. Rather, you allocate your money to expenses, savings and debt payments.

Why is zero based budgeting the best method?

budget is meant to summarise the saving and spending that has taken place over the past year. The zerobased budget is considered by some to be the best method of budgeting because: The zerobased budget ensures that all capital you make is assigned a specific purpose.

What are the advantages and disadvantages of zero based budgeting?

The major advantages of zero-based budgeting (ZBB) are flexible budgets, focused operations, lower costs, and more disciplined execution.

The main disadvantages include the possibility of resource intensiveness, budget manipulation by savvy managers and a natural bias toward short-term planning.

Where is zero based budgeting used?

Zerobased budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zerobased budgeting starts from a “zero base,” and every function within an organisation is analysed for its needs and costs.