How Zero-based budgeting is effective for your business?

Introduction:

Zero-based budgeting (ZBB) is about the expenses pertaining to each new period. The process starts from a zero base. There is an analysis of each and every function with respect to the needs and costs. Budgets are made considering the need for the upcoming period, regardless of the previous budget. Zero-based Budgeting is a technique in itself that provides good planning to cut down the spending and increase profit.

How to make Zero-based budgeting?

The subtraction of expenses from the incomes at a level when it turns zero is Zero-based budgeting.

Monthly income - An addition of all the sources of income and tracking every single rupee crediting to the bank account.
Monthly expenses – These are fixed in nature.
Irregular expenses
To reach zero while subtracting the expenses from the incomes.
Monitor the spending

ZBB with an irregular income:

The lowest monthly estimate – To set the budget based on the lowest monthly estimate in case there is an irregular income.
After finding out the lowest monthly estimate, one should start preparing a budget.
The third step is to adjust the same over a period of time.
The hill and valley fund – The rise in savings indicates that you are on a hill and a Decline in savings indicates that you are in a valley.

First step:

Write down all the bills payable.
Determine the maximum limit and minimum limit and cap.
Find out the amount you need for your routine necessities.

Second step:

This is like an investment. Allocate some amount in a fund.
Figure out the amount that you can pull back from the fund in case of need.
If you have nothing to allocate to a Hill and Valley Fund, reduce the controllable expenses.
Simply copy the pre-decided amount to next month.

Importance of ZBB:

In business, profit matters the most and profit can go upwards when there is a downward trend in expenses. It is important for those businesses that want to keep their budget short when it comes to expenses and high when it is about profits.

All the departments get evaluated in terms of the real cash flows. A good picture of the financials is the output.

It also helps in optimum allocation of resources and helps in improving communication thereby removing the gap.

Process of ZBB:

Identification of the Decision Units - One has to very minutely identify the best decision units
Making Decision Packages - Decision packages are to be made keeping in mind various things.
Ranking Decision Packages - Ranking is to be done on some basis to provide a clear picture.
Allocating Available Resources - Allocation of resources is required to properly distribute the amount.
Controlling and Monitoring - Proper monitoring and control helps to increase profits.

When to use ZBB?

You can use this principle when you prepare a budget for a big group.

Zero-based budgeting vs Traditional Budgeting:

Traditional budgeting is a very simple method and focuses on historical data whereas zero-based budgeting is a complicated method that focuses on the estimated data.
Traditional Budgeting is a technique that takes immediately preceding year's budget as a base whereas Zero-based budgeting means a budgeting method, whereby whenever the budget is set, the activities are re-evaluated.
Traditional budgeting is not as clear and as responsive as zero-based budgeting is.
In traditional budgeting, top management is responsible whereas, in Zero-base budgeting, this responsibility is shifted from top management to the manager of the decision unit.