Zero based budgeting PPT, Financial Management

1. ZERO - BASED BUDGETING
Submitted to: Dr. Nishi Sharma
Prepared by:Jamshid Raqi

2. CONTENTS:
 Meaning of zero based budgeting decision
 Purpose of zero based budgeting decision
 Concept of zero based budgeting decision
 Zero based budgeting decision tree
 How to make a zero based budgeting decision
 Zero based budget steps
 Advantages
 Disadvantages
 Example
 Zero based budgeting vs traditional budgeting
 Zero based budgeting vs activity base budgeting

3. MEANING
zero-based budgeting definition goes as a method of budgeting whereby all the
expenses for the new period are calculated on the basis of actual expenses
that are to be incurred and not on the differential basis which involves just
changing the expenses incurred taking into account change in operational
activity. under this method, every activity needs to be justified, explaining the
revenue that every cost will generate for the company.

4. PURPOSE OF ZERO BASED BUDGETING
ZERO-BASED BUDGETING AIMS to put the onus on managers to justify
expenses, and aims to drive value for an organization by optimizing costs and
not just revenue.

5. CONCEPT OF ZERO-BASED BUDGETING
• zero-based budgeting is a way of budgeting where your income minus your expenses
equals zero. with a zero-based budget, you have to make sure your expenses match your
income during the month. that way you’re giving every dollar that’s coming in a job to do.
• now, that doesn’t mean you have zero dollars in your bank account. it just means your
income minus all your expenses equals zero.
• pretty simple, right? basically, it’s just a plan for your money.
• let’s say you earn $3,000 a month. everything you spend, save, give or invest should to
add up to $3,000. that way you know exactly where every one of your hard-earned dollars
is going. you could be setting yourself up for disaster if you don’t know where your money
is going each month. it’s no fun to look up one day and find out you have no money—and
no clue—where it all went!

7. HOW TO MAKE A ZERO-BASED BUDGET
 write down your monthly income. ...
 write down your monthly expenses. ...
 write down your seasonal expenses. ...
 subtract your income from your expenses to equal zero. ...
 track your spending throughout the month.

8. ZERO BASED BUDGETING STEPS
 Identification of a task
 Finding ways and means of accomplishing the task
 Evaluating these solutions and also evaluating alternatives of
sources of funds
 Setting the budgeted numbers and priorities

10. ADVANTAGES
• ACCURACY: this type of budgeting helps companies to evaluate every
department to ensure they are appropriately funded.
• EFFICIENCY: it helps judge the actual needs by focusing on current
numbers rather than the momentum of previous budgets.
• REDUCED WASTE: it can remove redundant spending by re-examining
potentially unnecessary expenditures.
• COORDINATION AND COMMUNICATION: it allows for better
communication within departments by involving employees in decision-
making and budget prioritization.

11. DISADVANTAGES
 BUREAUCRACY: creating zbb within a company can take enormous amounts of time, effort, and analysis that
would require extra staff. this could cause the process to be counterproductive in cutting costs.
 bloat: in using zbb, managers can skew proposed budgets to characterize expenditures on pet projects as
vital activities, inventing a "necessity" for them.
 NTANGIBLE JUSTIFICATIONS: this type of budgeting requires departments to justify their budget, which
can be difficult on many levels. departments such as advertising and marketing have to justify expenses they
may or may not use in the next year due to the fluctuation of the market. this could cost them profits in the
future due to not being able to justify a certain amount.
 MANAGERIAL TIME: zbb comes at the cost of time and training for managers. this means spending
significantly more time every period on the budget.
 SLOWER RESPONSE TIME: due to the amount of time and training is required to do zbb, managerial staff
could be less likely to revise the budget in response to a changing market. this means that it will take longer
for a company to move money into departments that need it the most at the time.

12. EXAMPLE
EXAMPLE OF ZERO-BASED BUDGETING
• suppose a company making construction equipment implements a zero-
based budgeting process calling for closer scrutiny of manufacturing
department expenses. the company notices that the cost of certain parts
used in its final products and outsourced to another manufacturer increases
by 5% every year. the company has the capability to make those parts in-
house using its own workers. after weighing the positives and negatives of
in-house manufacturing, the company finds it can make the parts more
cheaply than the outside supplier.

13. instead of blindly increasing the budget by a certain percentage and masking
the cost increase, the company can identify a situation in which it can decide to
make the part itself or buy the part from the external supplier for its end
products.

14. TRADITIONAL BUDGETING
VS
ZERO-BASED BUDGETING
BASIS FOR
COMPARISON TRADITIONAL BUDGETING ZERO-BASED BUDGETING
Meaning Traditional Budgeting alludes to a
technique of preparing budget, that takes
immediately preceding year’s budget as a
base.
Zero-based budgeting means a
budgeting method, whereby
whenever the budget is set, the
activities are re-evaluated.
Focuses on Previous level of Expenditure New economic appraisal
Orientation Accounting oriented Decision or project oriented
Justification Justification of current project is not
required.
Justification of current and proposed
projects is required, considering
benefits and costs.
Justification
Authority
Justification is given by top management
for the particular decision unit
Justification is given by the manager
for the particular decision unit.

15. CONCLUSION:
Zero-based budgeting aims at reflecting true expenses to be incurred by a
department or a state [in the case of budget making by the government].
although time-consuming, this is a more appropriate way of budgeting. at the
end of the day, it is a company’s call as whether it wants to invest time and
manpower in the budgeting exercise to provide more accurate numbers or go
for an easier method of incremental budgeting.

16. REFERENCES:
• HTTP://WWW.BUSINESSDICTIONARY.COM/DEFINITION/ZERO-BASED-
BUDGETING-ZBB.HTML
• HTTP://WWW.MCKINSEY.COM/INSIGHTS/CORPORATE_FINANCE/FIVE_MYTH
S_AND_REALITIES_ABOUT_ZERO_BASED_BUDGETING
• HTTP://WWW.ACCOUNTINGTOOLS.COM/ZERO-BASED-BUDGETING