Zero Based Budgets Essay

2135 Words9 Pages
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.
Because of its detail-oriented nature, zero-based budgeting may be a rolling process done over several years, with only a few functional areas reviewed at a time by managers or group leadership.
Zero-based budgeting can lower costs by avoiding blanket increases or decreases to a prior period's budget. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. The practice also favors areas that achieve direct revenues or
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Some departments can utilize an in-depth study of a zero-based budget while others can use a rolling budget. This is a way to spread the extensive work over a number of years instead of concentrating on one certain year. Many organizations have implemented the system in some form or another and found that it did not work. If properly implemented, however, the process could have a considerable improvement over traditional rolling budgets. The number and nature of decision packages varies from organization to organization; it is not uncommon for large organizations to identify several thousand packages. Furthermore, it is often hard or even impossible for top executives to have the necessary knowledge or time to develop and rank priorities for thousands of packages.
To alleviate this problem, managers, after ranking their own packages, can have their top executives rank the packages of all the managers that report to them. This approach is used by one of zero-based budgeting's pioneers, Texas Instruments. Another solution is for each level of management to rank a certain percentage of packages within its own area of responsibility. In this solution, the first level of management may rank 40 percent of the proposed packages; the next level may rank the next 40 percent of packages, while top management may concentrate on the remainder of the budget
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