ZERO-BASED BUDGETING (ZBB): Meaning, Merits and Demerits

The dreaded “B” word: budgeting. Let me start by saying congratulations if you’ve already tried budgeting and failed. Most people don’t succeed the first time. However, you probably fell short if you haven’t established a strategy that works for you. I want to discuss zero-based budgeting, example, a template, and its process.

Zero-Based Budgeting

When you use a zero-based budget, all of your revenue is allocated to the predetermined budgeting categories until there is no money left over.

For example, if your monthly income is $3,000, you would divide it equally between your expenses, debt repayments, and savings objectives until there was nothing left over. This method is sometimes called the “zero-sum method” because the end balance of your income minus your expenses is always zero. But from this point of view, the money you set aside for savings and paying off more debt is also an expense.

Benefits and Drawbacks of a Zero-Based Budget

Let’s now examine the benefits and drawbacks of zero-based budgeting and discuss when it could (and might not) be a good idea to employ one.

Let’s start by discussing the benefits of zero-based budgeting.

Benefits of a Budget That Starts at Zero

The following are a few advantages of zero-based budgeting:

• It offers great insight into spending patterns.  An advantage of zero-based budgeting is that it makes all of your spending transparent. This enables you to significantly reduce your expenditure on items that don’t support your objectives and beliefs.
•  It is a flexible budgeting strategy, second. Zero-based budgeting’s flexibility is one of its main benefits.

You don’t estimate your monthly spending with traditional budgeting and then cross your fingers that you don’t go over. Instead, you keep an eye on your expenditure in real time and adjust as necessary.

• The resulting budget is strategically sound and well-justified.
• improves internal cooperation within the company
• imposes restrictions on automatic budget increases, which typically lead to cost- and money-saving measures.
• increases productivity of processes by carefully assessing assumptions

Disadvantages of a Budget Based on Zero

Every action has a disadvantage, but the main one with this strategy is that it can be tiresome. Manually entering each week’s transactions into your zero-based budget might be time-consuming.

• Because the budget must be constructed from the start of each year, it is more expensive, time-consuming, and complicated than traditional budgeting, which is quicker, easier, and only requires an explanation for modest modifications.
• For businesses with limited resources, the cost may be exorbitant.
• When future savings are uncertain, it is risky.
• Timing issues with the budget cycle make execution difficult.
• demands more resources and frequently calls for specific knowledge or training.
• Operations of the organization can be hampered.
• The culture or brand of the company may suffer.

However, if you use an app that automatically imports transactions for you, you can reduce this administrative labor.

Zero-Based Budgeting Example 

Below is an example of a list showing a zero-based budgeting list.

For the purposes of this zero-based budgeting example, assume Nancy has a monthly after-tax income of $4,000. She might construct her zero-based budget as follows:

Total leftover: $0

In this zero-based budgeting example, Nancy has taken care of her basic needs as well as fun money (so that her budget doesn’t feel like a restricted diet), extra debt payments (so she can pay things off early), and savings goals (so she has a nice cushion between her and the unknown).

You can make your own zero-based budgeting using this example as a guide.

Zero-Based Budgeting Template 

The term “zero-based budget template” refers to a budget that is created from scratch and is primarily intended to explain the costs for each new period, as opposed to a standard budget where changes are made to previous budgets. Let us look at the different templates you can use for zero-based budgeting.

Top 5 Zero-Based Budgeting Template

Here are five fantastic zero-based budget templates to aid in money management. For those who want to create a budget in the traditional manner, I’ve provided editable spreadsheets and PDF printouts.

#1. Free Best Detailed Zero-Based Budgeting Template

Derek provides a wide range of free financial tools on his website, Life and My Finances. An online budget spreadsheet is available for Excel users to use. Use the other spreadsheets on Derek’s website, such as the college investment Calculator and the Debt Snowball spreadsheet.

#2. Best Free Zero-Based Budgeting Printable Template

You can print a free budget template in either color or black and white with the Simply Organized Home zero-based budget template. The form establishes a bottom line of zero dollars and provides areas for line items for envelope budgeting categories including spending money, pet care, and food.

#3. Best Free Zero-Based Budgeting Template

The Vertex42 zero-based budget template is the one I favor because it offers customers three download options: Excel, Google Sheets, or a free printable PDF. You can always amend this form to reflect your net income even though it uses your gross income and includes a space for payroll deductions. Additionally, it includes extra places for unique expense categories.

#4. Best Zero-Based Budgeting Template – Free for 50/30/20 Budgeters

This 50/30/20 budget plan is perfect for folks who don’t live paycheck to paycheck and want to accomplish their financial objectives more quickly. To access the template, you must become a blog subscriber to The Land of Milk and Money. But I’m sure the content on the blog will be worthwhile for you to read.

#5. Most Effective free “Anytime, Anywhere” Budget Template

Anyone with a Google account can get a free budget template in Google Sheets. The starting and ending balances of your accounts, as well as your overall savings for the time period, are displayed in the summary at the top of the page. Let’s talk about the best budgeting tools you can use to make a zero-based budget now that you know where to look for some fantastic zero-based budgeting templates.

Zero-Based Budgeting Process

Below is the list of things you need to consider while planning your zero-based budgeting process. They are as follows:

#1. Establish the Goals for Your Business.

At the beginning of a new fiscal year, it is customary to evaluate the prior year’s results and make plans for the coming year. Is maximizing revenue more essential to you than minimizing costs? To begin, your business must pick a single, measurable goal.

#2. Think of and Assess Potential Alternate Routes to Success in Achieving Goals

This second process of zero-based budgeting involves outlining the actions you’ll take to achieve the company goals you set in the previous phase. The most efficient means of distributing resources for achieving those goals must be thoroughly investigated.

#3. Learn Where Your Money is Going.

The next thing to do is to figure out how much it will cost to achieve your business goals. Include fixed costs like rent, utilities, and insurance in your business budget planning.

#4. Determine Untried Means of Funding Operations.

Donate to causes you believe in. By using this process of zero-based budgeting method, you can isolate the expenses that have the most impact on your company’s bottom line. Your current spending patterns can then be reevaluated.

A zero-based budgeting process could cause significant fluctuations in your finances from one period to the next. It’s possible to have a budget of $50,000 one year and a budget of $35,000 the next, since budgets don’t carry over from one year to the next.

What is the Benefit of Zero-Based Budgeting?

The precise meaning of a zero-based budget How does it function and what are the advantages?

When you follow a zero-based budget, you allocate all of your income to needs and wants, including short- and long-term savings and debt reduction. At the end of the month, you want your income less your expenses to equal zero.

What Are the Characteristics of Zero-Based Budgeting?

Zerobase. ZBB operates on the premise that each year, the estimated costs for each project or program must be calculated from the start. The people in charge of a decision unit must give a full explanation of why the unit should get any money at all. Without talking about how much his department has spent in the past, a new reason must be given.

This method makes it easy for the boss and the worker to talk to each other. Management officially provides the service, and management chooses to pay for it. Decision-making packages are linked to the different goals of an organization.

The primary emphasis is on the activities and programs.

• Most suitable for extra expenses.
• packages for decision-making.
• Accountability, cost-effectiveness, and bottom-up thinking

What Are the Limitations of Zero-Based Budgeting?

The way that budgeting is done affects how motivated employees are: 

• Mandated budgets, as opposed to those that have been debated and approved, are discouraging. 
• Setting impossible goals demotivates people.
• Budget allocation disagreements are one way that budgets fuel departmental strife.
• A “use it or lose it” mentality, where you overspend to save money for the following year, could result from sticking to your budget.
• Budgetary slack will emerge from setting too low of goals.
• Although a “name, blame, and shame” culture might exist, managers should only be held accountable for deviations that were specifically within their power to prevent.

What Is Zero-Based Approach?

Instead of providing a “one size fits all” solution for the entire company, a zero-based approach aims to connect organizational designs to strategic priorities (for instance, areas for investment compared with efficiency improvement). Zero-based firms build structures that can adapt when business objectives change by employing organizational designs that, rather than only evaluating current personnel, take into account the talent and capabilities required in the future.

being examined is the “art of the potential.” A program built on zero-based principles might serve as an inspiration for the creation of ideas that could profoundly transform the organizational structure of a company. Businesses may change how work is done by fostering a culture that values innovative solutions and breaks down organizational chart obstacles (often through stretch targets). As a result, a business that is better able to seize new possibilities may develop into one that is more responsive and adaptable.

Zero-basing the organization uses a clean-sheet design approach, a substantial factual base, and an extensive investment strategy to address common transformation obstacles. Businesses can adopt an agile, iterative working style to identify and address the necessary changes in behavior and thinking by using a number of design levers.

What Is the Core Characteristic of a Zero-Based Budget?

The core characteristic of a zero-based budget is having no money left over at the end of the month. If you have extra cash, you can put it toward saving for the following month, paying off debts, creating an emergency fund, or making a purchase.

How Can a Zero-Based Budget Fail?

• When organizations enter the process with erroneous notions of what zero-based budgeting is and isn’t, they are doomed to failure. Uncomfortable feelings will definitely arise when you consider it to be an “installable” program. ZBB, with its fresh capacity, requires and supports a change in culture.
• The focus of conventional zero-based budgeting techniques may be on SG&A and other expenses that are easy to manage and identify. That, however, says nothing about how effectively vital processes like marketing, buying, or production operations. Furthermore, it ignores issues like portfolio complexity. Three areas of focus must be taken into account for zero-based budgeting to be an exhaustive efficiency exercise.
• The technique itself takes a lot of time, money, and effort to use. Creating a budget from scratch involves a lot more time and effort than using a shorter, simpler method that only requires explaining incremental spending.
• There is a potential that managers will feel demotivated or distracted from their regular obligations as a result of a perceived need to check paper clips or control trip expenses, for example, because zero-based budgeting is difficult.
• Zero-based budgeting primarily focuses on controlling spending. Every company aspires to maximize efficiency and “do more with less,” but there is a chance that a cost-constrained approach could result in an unanticipated cultural shift.
• Because qualitative functions are challenging to analyze, there is a probability of reducing non-core costs that support a customer’s or consumer’s experience. Over time, this reduces the brand’s worth.
• A zero-based budgeting strategy can lower growth investment because short-term profits might be prioritized over long-term goals.
• Savings are assumed and are not unusual. Investing in the adoption of zero-based budgeting may be risky when cost savings are unknown.

Related Articles

• BUDGET MANAGEMENT TOOLS: Definition, and Best Budget Management Tools
• BUSINESS BUDGETING TOOLS: All You Need To Know, Types and Free Budgeting Tools
• 7 Practical Budgeting Tips to Save Money
• Capital Budgeting Decision Techniques and Analysis
• CASH BUDGET: How To Prepare a Cash Budget
• CASH COWS: Meaning, Examples, and Marketing

References 

• clevergirlfinance.co
• wallethacks.com
• deloitte.com