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A method of budgeting in which all expenses must be justified for each new period. Zero-based budgeting starts from a "zero base" and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.
ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.
Zero based budgeting is a type of budgeting where in every time a new budget is prepared from scratch without using the previous budgets estimation and variances in actual versus budgets.
In this budgeting, lots of resources and time is required as managers have to rethink all the process and budget items from start.
Its an approach to planning and decision-making that reverses the working process of traditional budgeting. In zero-based budgeting, every line item of the budget must be approved, rather than only changes. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting from the zero-base. This process is independent of whether the total budget or specific line items are increasing or decreasing.
Good answers
The basic concept is simple. You create your budget without making any assumptions. You certainly don’t come up with your number by adding a percentage to last year’s actuals. And you don’t start with the question “What can I get past finance?” Rather, you start from the beginning, or zero, and try to justify everything you do and the money you spend on it.
The problem is that the cost base upon which the estimates were originally built is often an historic one where year on year some degree of cost inflation has been added to last year's outturn with little or no thought to the budgeting process. In some organisations (and particularly the public sector) this behaviour is exacerbated by the policy of "use it or lose it" implying that if you really have no use for the money this year then clearly you have no use for it next either.
