What is Zero-Based Budgeting ?

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Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. The budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

Definition

Zero-Based Budgeting (ZBB) is a budgeting method where every expense must be justified for each new period. The process starts from a 'zero base,' analyzing every function within an organization to determine its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

Origin

Zero-Based Budgeting originated in the 1970s, developed by Peter A. Pyhrr at Texas Instruments. It was initially used to help companies allocate resources more effectively and was introduced to the public sector in 1973 by the state government of Georgia, becoming a significant tool for public budgeting.

Categories and Features

Zero-Based Budgeting is mainly categorized into corporate ZBB and government ZBB. Corporate ZBB is typically used in the private sector to enhance flexibility and efficiency in resource allocation. Government ZBB is used in the public sector to improve transparency and accountability. Its features include: 1. Comprehensive cost analysis; 2. Flexibility in resource allocation; 3. Encouragement of innovation and efficiency.

Case Studies

A typical case is Texas Instruments adopting Zero-Based Budgeting in the 1970s to enhance its resource allocation efficiency. This method allowed the company to better identify and eliminate unnecessary expenses. Another example is the state government of Georgia adopting ZBB in 1973 to improve the efficiency and transparency of public fund usage. This initiative helped the state manage its budget better and achieve higher efficiency in public services.

Common Issues

Investors might encounter issues such as the complexity and time-consuming nature of implementing ZBB, the need for comprehensive employee training, and potential short-term operational disruptions. A common misconception is that ZBB is solely for cost-cutting, whereas it actually focuses on effective resource allocation and utilization.

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