Zero-based budgeting

Use this structured process to create a culture of cost management within your business.

In recent years zero-based budgeting appeared to experience a renaissance, as cash-strapped businesses had to justify every penny of their spending.

While the UK economy continues to be volatile, it's vital that smaller businesses cut unnecessary expenditure while trying to grow at pace.

Sustained use of zero-based budgets could help to enforce a culture of cost management.

Isn't it time you examined whether it can benefit your business?

What is zero-based budgeting?

Zero-based budgeting means budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending.

By starting from a 'zero base' at the beginning of each budget, you can create a really effective process for analysing and deciding where to allocate your funds.

It is essentially a way of improving return on investment (ROI) across your business.

Who developed it?

Peter A. Pyhrr developed the idea of zero-based budgeting in 1969 while he was an account manager at Texas Instruments in the US. 

In 1977, he wrote his seminal book on the subject, 'Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses'.

Jimmy Carter, then Governor of Georgia, was the first to adopt the process of zero-based budgeting within government when preparing the fiscal 1973 budget.

Advantages of zero-based budgeting

Here are some common advantages of zero-based budgeting.

• Helps a business assess whether each of its departments is appropriately funded
• Allows management to focus on current numbers rather than the figures within previous budgets
• Can remove needless spending
• Can enable better communication within departments by involving employees in decision-making and budget priorities

Disadvantages of zero-based budgeting

Unfortunately, zero-based budgeting doesn't guarantee you'll make savings, as the trick is in how you execute it.

Moreover, the process can be complex and there may be opposition from managers who fear their budgets are under threat and who don't relish having to justify their spending.

That's why clear communication, and making sure you involve staff at all levels of the business, can help the process to work more effectively.