Zero-based budgeting

Zero-based budgeting originated in the 1970s, and it is not a very complex process. Many businesses will budget and plan out things to maintain financials. In the past, businesses would only look at specific things and would assume that everything is already in place and does not need to be double-checked. However, in zero-based budgeting, everything that is to be budgeted needs to be approved. Since zero-based budgeting requires an approval for budgeting, this means that budgets are started from a zero-base, with a fresh decision on everything being made every year.

Zero-based budgeting (ZBB) can also be used as a personal way to budget money. The point of a zero-based budget is to make income minus the outgo equal zero spent. This means that money not only needs to be budgeted, but also that one must not spend money that is not there to spend.

As an accounting manager for Texas Instruments, Pete Pyhrr created zero-based budgeting. In an interview by People magazine, he stated that many line items were historically and traditionally budgeted regardless of the need for the item. Mr. Pyhrr was subsequently asked by Georgia governor Jimmy Carter to manage the Georgia budget process. Pyhrr authored "Zero Based Budgeting: A Practical Management Tool for Evaluating Expenses".

According to Peter Sarant, former director of management analysis training for the United States Civil Service Commission, ZBB is "a technique which complements and links to existing planning, budgeting and review processes. It identifies alternative and efficient methods of utilizing limited resources. It is a flexible management approach which provides a credible rationale for reallocating resources by focusing on a systematic review and justification of the funding and performance levels of current programs."

Zero-based budgeting is 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. Costs can be first grouped, then measured against previous results and current expectations.

There are five misconceptions about Zero-Based Budgeting that can make financial advisers shy away from using this type of budgeting.

1. The idea that zero-based budgeting is just starting your budget from a zero sum.

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