Business, Legal & Accounting Glossary
A cash flow budget in which the manager responsible for it’s preparation is required to prepare for and justify the budgeted expenditure from a zero base. i.e. assuming that initially there is no commitment to spend on any activity. 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.
Method of preparing cash flow budgets and operating plans which start from zero at the beginning of each year.
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.
The proposal that the budgets of governments and other organisations should be designed starting from first principles, defining the aims of the organisation and adopting the best method of achieving them.
This is contrasted with the usual budgetary procedure, which starts from the previous period’s budget and makes marginal changes.
As real world organisations are committed to contracts with their employees and suppliers, and are affected by public perceptions about pricing and the services they require, zero-base budgeting is difficult to achieve.
Traditional budgets allocate funds for future expenditures. They require managers to ensure that all organizational activities are adequately carried out within the allocated funds. Traditional budgets, therefore, focus primarily on the resources allocated to facilitate organizational activities. Zero-sum budgeting, also called zero-based budgeting, is an alternative to traditional budgeting that was first popularized in the 1970s. Unlike traditional budgets that emphasize only the financial aspects of a budget, zero-sum budgets focus on the outputs of the activities that are being budgeted for.
The Chartered Institute of Management Accountants (CIMA) defines zero-sum budgeting as a “method of budgeting that requires all costs to be specifically justified by the benefits to be expected.” The budget starts with zero and allocates funds on the basis of the expected benefits that are to be derived from those funds. In other words, the budget starts from the results that are to be achieved and works backward to allocate required resources. The process starts with a specific account, such as delivery expense for a box company, for example, and then attempts to apply common sense for coming up with an optimal budget amount. For example, the budget accountant may assume that the company will deliver 1,200 boxes over the year, and average postage per box will be $2. The total zero-sum amount the accountant will allocate to delivery expense will be 1,200 multiplied by the $2 cost per box. This process is repeated for each department and account.
Peter Pyhrr, an American, conceptualized the zero-sum budgeting approach in 1973. Pyhrr went on to develop and implement zero-sum budgeting at Texas Instruments (TI) in Dallas, where he was then employed as a manager, and in the State of Georgia. The budgeting system was popularized when President Jimmy Carter pledged to use it to curb government spending in the 1970s.
Zero-sum budgeting is efficient and accurate in terms of resource allocation. It forces managers to justify the activities they plan to undertake, thereby eliminating slack, or the underestimation of revenues and the overestimation of expenses.
Zero-sum budgeting is time-consuming, as budget makers must justify each budget item. The budgeting process is complex and requires considerable effort. Zero-sum budgets are resource-intensive and expensive to implement organization-wide.
ZBB
Zero Based Budgeting, also called ZBB, is the process of creating a budget from nothing without using the prior year’s budget or spending numbers. No activities are assumed to be untouchable. All expenses are judged and must be justified in order to remain within the budget.
Essentially, the management must start from scratch and look at every operation and every activity to determine whether it is worth spending the company’s money. The management must also set completely new spending goals.
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This glossary post was last updated: 28th December, 2021 | 0 Views.