Importance of Zero Based Budgeting & Its Benefits to Your Business

You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing. The zero-based budgeting is best suited to discretionary costs, for example, research development, advertising and training costs.

Zero Based Budgeting ( ZBB ) – Overview & Advantages

Continue reading to learn how you can effectively implement ZBB to improve your organization’s financial health. Traditional annual budgets are often produced by taking the previous year’s actuals and adding a few percentage points to account for wage rises and inflation. This simplified and incremental budgeting can lead to inefficiencies and missed opportunities for greater cost savings.

Solving your most complex planning challenges

1. Your business can develop or modify its own unique approach to ZBB, and the following five steps can provide a baseline for implementation.
2. The zero-based budget makes a person aware of how much money flows in and out.
3. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner.
4. Costs can then be first grouped and then measured against previous results and current expectations.
5. The swift pace of change in today’s competitive business world is driving chief financial officers (CFOs) to uncover new ways to dramatically reduce waste, grow the top line, and sharpen their competitive edge.
6. The government made it mandatory for all Ministries to review their programmes and activities and prepare their expenditure estimations based on the zero-based budgeting concept.

Officials in the Hubei province and the DBR began looking for ways to incorporate the best parts of ZBB and form a new budgeting system that would work for their needs. The result of this change was a Chinese-styled Target-Based Budgeting system. This form of budgeting required bureaucracies and agencies to submit a simple budget within a pre-set time limit. TBB, as a modified form of ZBB, has worked out moderately well for the Chinese government in Hubei over the years, but many problems still face the budgeting system. Advancements in planning technology enabled businesses to re-evaluate the opportunity of ZBB and successfully implement within the organization.

The Future of Client Engagement: Co-Piloting with Digital Platforms

ZBB may reward short-term perspectives in the company by allocating more resources to operations with the highest revenues. Areas such as research and development or those that have a long-term horizon, may be overlooked as a result. The practice favors areas that achieve direct revenues or production because their contributions are more easily justifiable than in departments such as client service and research and development.

The only word of caution is not to keep changing the goalpost and thereby get back into a comfort zone and get into a false sense of accomplishment. Then, all the efforts & advantages of a ZBB will come to nought(zero). On a side note, the Government of India also uses ZBB for expenditure budgets and since 1986 it is mandatory for all ministries to use the ZBB approach for preparing their expenditure estimates. So, the primary difference between traditional and zero based budgeting is that there is typically a blanket increase in budget allocation with conventional budgeting. With zero based budgeting, however, there can be a decrease in allocation. Zero based budgeting means budgeting where each function within the company is analyzed and the required budget justified, with no relation to what budget was allocated previously.

Communication between departments can improve by involving employees in decision-making and budget prioritization. ZBB may be undertaken as a “rolling process” spread over several years so that only a limited number of departments or business functions are affected each year. Implemented effectively, ZBB is a cost discipline enabling businesses to improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings.

Suppose a construction equipment company implements a zero-based zero based budgeting in india budgeting process calling for closer scrutiny of manufacturing department expenses. The company notices that the cost of certain parts used in its final products and outsourced to another manufacturer increases by 5% every year. Traditional budgeting calls for incremental increases over previous budgets such as a 2% increase in spending. Zero-based budgeting requires a justification of both old and new expenses. Finally, experience shows that the technical aspects of a spending review and identifying potential savings is the less challenging part.

For example, a recent Accenture survey suggests that approximately 72% of CFOs have the final say on the technology direction of their enterprises. 1  See Richard Allen and Robert Clifton, “From zero-base budgeting to spending review – achievements and challenges”, Development Southern Africa, 2023. The paper originated in a workshop on ZBB organized by the South African National Treasury in January 2021. Several experts including Sami Yläoutinen, Gerhard Steger and Julien Dubertret contributed to the workshop and to the ideas expressed in this paper. Here, you will look at each expense and examine how it benefits the company toward achieving business goals. In addition, you will find new ways of spending and identify how to cut down on spending for certain functions.

Identify Business Goals

1. With the zero based budgeting process, each area of the business is considered separately.
2. Finally, experience shows that the technical aspects of a spending review and identifying potential savings is the less challenging part.
3. However, the development of the budget can take time, effort, and additional staff.
4. If you’re on Baby Step 2, you aren’t thinking savings first.
5. If you get paid more than you planned, do a little fist pump—then add that extra money to your Baby Step or another budget line.
6. Federal law affects environmental program spending, and both state and federal courts help determine state spending on prisons.
7. This method requires all expenses to be justified for each new period, focusing on cost-benefit analysis and needs assessment.

Examples of companies that have successfully implemented ZBB…include a consumer goods company that was able to achieve 18 percent savings and a 20 percent increase in the share price. Another case was that of a prominent commercial bank, which unlocked a large sum of money and reinvested it in “going digital” and a healthcare company that achieved savings of £1.2bn (€1.36bn) in three years. To the extent that ZBB has encouraged governors and legislators to take a hard look at the impact of incremental changes in state spending, it produced a significant improvement in state budgeting. But in its classic form – begin all budget evaluations from zero – ZBB is as unworkable as it ever was. To create a zero-base budget involvement of the employees is required. You can ask your employees what kind of expenses the business will have to bear and figure out where you can control such expenses.

Budget requests reflect a cut of a certain percentage, the current level of spending, and an increase of a certain percentage. This allows the opportunity of trading between departments of the funding of a lower priority of one department to a higher priority of another. Sunset legislation places certain programs implemented or that are currently being funded under review to determine efficiency, effectiveness and necessity. Because of this, the difficulty of prioritizing all the possible government programs becomes confusing.

If a particular expense fails to benefit the business, the same should be axed from the budget. ZBB creates a system of accountability with each function, wherein managers write down how much is required and what it will be used for. This way, you know where the money is going, helping you run your business more effectively. If you are a start-up, you can benefit the maximum by adopting the ZBB model.