Zero-Based Budgeting (ZBB)

Zero-based budgeting (ZBB) is a budgeting process that starts with a clean slate each year. This means that all expenses must be justified, regardless of whether or not they were budgeted for in the previous year.

ZBB is often used in businesses to control costs and improve efficiency. It can also be used by individuals to manage their personal finances.

The first step in ZBB is to identify all of the activities that the organization or individual is responsible for. Once these activities have been identified, the next step is to estimate the cost of each activity.

The costs of each activity are then compared to the benefits that the activity provides. If the benefits of an activity outweigh the costs, then the activity is kept. If the costs of an activity outweigh the benefits, then the activity is eliminated or reduced.

The final step in ZBB is to create a budget that reflects the activities that have been kept or reduced. This budget is then used to allocate resources for the upcoming year.

ZBB has several advantages over traditional budgeting methods. First, ZBB forces managers to justify all of their expenses. This can help to identify unnecessary costs and improve efficiency. Second, ZBB can help to create a more realistic budget. By starting with a clean slate each year, ZBB prevents managers from simply adding a percentage to their previous year's budget. Third, ZBB can help to improve communication between managers and employees. By requiring managers to justify their expenses, ZBB can help employees to understand why certain decisions are being made.

However, ZBB also has some disadvantages. First, ZBB can be a very time-consuming process. Second, ZBB can be difficult to implement in organizations that are not used to it. Third, ZBB can lead to managers making decisions based on short-term costs rather than long-term benefits.

Overall, ZBB is a budgeting process that can be used to control costs, improve efficiency, and create a more realistic budget. However, ZBB is not without its disadvantages. It is important to carefully consider the advantages and disadvantages of ZBB before deciding whether or not to implement it.