What is zero-based budgeting (ZBB)?
What is the difference between ZBB and Traditional budgeting?
Should I use ZBB?
What is ZBB ?
ZBB is when a company starts its budget from zero every year. Instead of looking at last year's budget and making small changes, they start fresh. They have to give good reasons for every rupee they want to spend.
Thinking about making a budgets from scratch for large organizations, or even for departments within them, might sound scary. But many companies find it helps them spend money more wisely.
ZBB vs Traditional Budgeting:
Traditional budgeting is like planning your monthly expenses based on what you spent last month. You look at your old budget, maybe add a bit more for some things that got pricier, and cut back a little on others. It's comfy because you're working with familiar numbers.
ZBB: Imagine you're starting fresh every month, with no idea what you spent before. You have to think hard about every single rupee you want to spend. "Do I really need this? How much exactly? Why?" You ask these questions for everything, big or small.
The big difference is in the mindset. Traditional budgeting assumes what you did before was mostly okay and just needs a little tweaking. ZBB, on the other hand, doesn't assume anything. It makes you justify every expense from scratch. It's like the difference between tidying up your room and completely emptying it out to decide what really needs to be there.
This ZBB method can be a lot more work, but it often helps companies find clever ways to save money or spend it on more important things. It's especially good for shaking things up when a business needs a big change. Traditional budgeting is easier and faster, but it might miss opportunities to make big improvements.
How to adopt ZBB?
1. Start Small: Instead of doing ZBB for the whole company, why not try it for just one department? Pick a team or a small part of the business and give ZBB a go there. It's like testing the waters before diving in.
2. The 80-20 Rule: Focus on the big stuff first. Apply ZBB to the top 20% of expenses that make up 80% of your budget. For the rest, stick to the old way of budgeting. This way, you're tackling the most important parts without getting overwhelmed.
3. Gradual Roll-out: Introduce ZBB bit by bit over a few years. Maybe in the first year, you do it for 25% of your budget. Next year, bump it up to 50%, and so on. It's like slowly turning up the heat instead of jumping into hot water.
4. Expense Categories: Apply ZBB to specific types of expenses across the company. For example, start with certain critical projects or products. It's a way to practice ZBB without shaking up everything at once.
5. ZBB Lite: Instead of starting from zero every year, maybe do it every alternate year. In between, you can use traditional budgeting but with a more critical eye, inspired by ZBB thinking.
Conclusion:
In the end, the best choice depends on what a company needs. Some might benefit from the shake-up that ZBB provides. Others might do just fine with Traditional Budgeting. And many might find a middle ground, using bits of both.
The key is to pick the method that helps your company use its money in the smartest way possible. After all, that's what budgeting is all about!
My personal recommendation - use ZBB Lite as described above.
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