Defining Zero-Based Budgeting

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ZERO-BASED BUDGETING What is Zero-Based Budgeting? Zero-based budgeting is an innovative approach towards budgeting in corporations that is based on the framing of assumptions about costs and benefits each time the budget is prepared. A budget is a plan for the allocation of financial resources by an organization. Organizations possess finite financial resources that managers allocate among various projects with the expectation that the utilization of financial resources during the operation of these projects will enable the organization to earn a targeted level of revenues or profits. Like every plan, the budget is based on some assumptions about what the costs and revenues will be affected by, and what the magnitude of these effects will be. These assumptions may change each time a budget is made and thus may need to be incorporated in the new budget. As opposed to the conventional form of budgeting which will be discussed later in this paper, zero-based budgeting does not assume that the assumptions made at the time of the last budget are still valid in the present context. Therefore, the assumptions have to be developed again and justified before senior management in order to win approval for the allocation of financial resources planned in the budget (Prokopenko, 1987). In revising the assumptions afresh, in zero-based budgeting, the planner does not base his or her estimates for the next year on the basis of the figures of the previous year. This is the historic
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