Zero-base Budgeting Explained
“It can be called a planning and budgeting process, which requires each manager to justify its entire budget request in detail from scratch and shifts the burden of proof to each manager. ”
A budget is the monetary or the quantitave expression of business plans and policies to be pursued in the future course of time. Zero-base budgeting is the latest technique of budgeting and it has an increased use as a managerial tool.The good point about this technique is that bit is much simpler and easier than those techniques that keep track of an awfully large number of factors in business. With this technique, the business people need to be concerned about the present and only the immediate past.
This technique was first used in America in 1962. The former president of America, Jimmy Carter used this technique when he was the governor of Georgia. This method was used to control he state expenditure. As the name suggests, it is very similar to starting from a scratch.
A normal technique of budgeting is to use previous year’s cost levels as a base for preparing the existing year’s budget. This method carries inefficiencies of previous years to the present year because we take the last year as a guide and decide what is to be done this year. The performance of the preceding year is taken as a reference point for this purpose.
In zero-base budgeting every year is taken as new year and previous year is not taken as a base. Zero is taken as a base and likely future activities are decided according to the present situation.
It can be called a planning and budgeting process, which requires each manager to justify its entire budget request in detail from scratch and shifts the burden of proof to each manager.
The manager has to explain every cent of money spent by him. The approach requires that all activities are to be analyzed in decision packages, which are evaluated by systematic analysis. These are then ranked in order of importance.
In zero-base budgeting performance is important. Managers have to justify why they want to spend. The preference of spending on various activities depends on their justification and priority for spending.
It has to be proved that an activity is essential and the amount asked for it is really reasonable. This cannot be ascertained without determining the total capacity of a particular business activity.
Author - DeeKay
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