The Zero-Based Budgeting (ZBB) methodology is a budgeting approach that requires decision-makers to re-evaluate, from the ground up, every expenditure in order to determine its value and appropriateness. Unlike traditional budget allocations, which are often based on last years budget and where funding is allocated on a built-up basis, when using ZBB, each item or function is considered separate and funding levels are built up based on current needs and the cost of delivering it.
In the Zero-Based Budgeting approach, decision-makers are required to consider the cost/benefit of each activity or expense in the budget, and then to balance any costs against future potential benefits. Decision-makers will compare potential future benefits to current costs in order to decide whether or not a given item should be included in the budget. This process is often referred to as “allocating resources to outcomes” since the ultimate objective of the process is to ensure that all available resources are allocated in an efficient and effective way.
The process of Zero-Based Budgeting typically starts with a top-down review of all existing expenditures, in order to identify any activities or expenses that are either unnecessary or potentially not delivering an acceptable return on investment. At this stage, all expenditure should be justified in terms of tangible evidence of performance and value for money. Only those activities that can substantiate their contribution to the organisation’s goals and objectives should then be included in the budget.
In the subsequent steps in the ZBB process, decision-makers then evaluate all areas of expenditure, including those that were previously included. This includes fixed costs, variable costs (such as staff or equipment), and any strategic investments. Each expenditure is thoroughly reviewed and, if necessary, restructured or replaced in order to ensure the greatest possible return on any given item.
In addition to the comprehensive review of all expenditure, the Zero-based Budgeting approach also requires decision-makers to consider alternative options for the delivery of services or activities, in order to find the most cost-effective solution. This could mean devising new or innovative ways to deliver a service or finding alternative suppliers with competitive pricing. All of these options are considered as part of the decision-making process.
Ultimately, the objective of the Zero-Based Budgeting process is to maximize the return on investment, while ensuring that all expenditure is justified in terms of the benefits that it provides to the organization. While the process can be difficult and time consuming, the potential benefits to an organizations budget can be significant. By utilizing this approach, decision-makers can rest assured that all available resources are allocated to those activities that are both cost-effective and bring the greatest return.
