Zero-Based Budgeting : Meaning, advantages and disadvantages

DEFINITION of 'Zero-Based Budgeting
ZBB' A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs.
Zero-based budgeting is a budgeting method where every expenditure must be justified every budget cycle. When the company/country begins a budget process, they start from zero. Each department must request funds via a detailed plan describing what each allocation of funds will be used for and what benefits the company will receive from it.

The Zero-Based Budgeting Process
Let's say you're a manager in a company that uses zero-based budgeting. What will actually happen when the time comes to plan for next year?The first step: you'll be asked to put together a budget for your department for the upcoming year. It will need to include all costs for your department including salaries, travel, and supplies. You'll also need to justify these costs by explaining exactly what the company will get from those expenditures. Perhaps you'll assemble 50 cars? Or sell 20,000 widgets? Or provide financial statements each month and make sure all employees are paid accurately?
The next step: once you've turned in your budget, you'll probably be asked to present it to a group including senior management and the budgeting staff. You'll present your numbers and justification, and then you'll answer questions about the amounts you're requesting. Sometimes, companies will reduce or eliminate line items during the meeting if management doesn't feel the expenses are necessary.
The final step: once all the meetings are done, the budget staff will adjust budgets based on direction from senior management. They will then provide a final consolidation to management for approval. Once it's approved, the budget for your department will be sent back to you, and you can begin planning based on your final approved plan.

Advantages of Zero-Based Budgeting
The primary advantage of zero-based budgeting is that each cost is re-evaluated each year.  A country that bases its budget on prior year actual costs might continue to pay for the service, not realizing it's no longer needed. In zero-based budgeting, every expenditure is revisited, so that anything not contributing to the country's current objectives can be eliminated.

Dis-Advantages of Zero-Based Budgeting
One of the major shortcomings of zero-based budgeting is that it can reward short-term thinking by shifting resources towards areas of the country that will generate revenues over the next calendar year. Some areas of the country are long-term investments, such as research and development or worker training. These won't be generating revenue in the near term, but over the long term, they are the keys to remaining competitive.

Zero-based budgeting is also quite resource-intensive. It takes a lot more time and effort to draw up a budget from scratch rather than modify an existing budget. Many critics argue that the benefits of zero-based budgeting do not justify its time cost. Further, the process can be gamed by savvy Permanent Sectaries to get more resources into their Ministries. It can lead to a change in culture where there is a decreased spirit of cooperation in Ministries/organizations, as staff feel expendable




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