Zero based budgeting is one of the methods of budgeting; in this method, the budget for any activity starts from zero and not on the basis of past year expenses. So for example if the expenses of marketing division of a company for the year 2015 are $5000 than in case of zero based budgeting marketing division cannot claim a budget of $5000 or above rather their budget will start with zero and they have to justify all the expenses before claiming the any amount for the budget. Given below are some of the advantages and disadvantages of zero based budgeting –
Advantages of Zero based budgeting
- The first and foremost advantage of zero based budgeting is that any departmental head cannot justify expenses on the basis of past expense or record, so if in the past due to some extraordinary expense the departmental budget is high in one year than departmental manager cannot claim budget equal to or more than previous year budget in the case of zero based budgeting.
- Another advantage of zero based budgeting is that top management can identify the areas or departments where there is wasteful expenditure because if budget to department were given on incremental basis then it could have resulted in wasteful expenditure getting overlooked as only criteria for passing the budget in incremental basis system is to add certain percentage of previous year budget and give it to the department concerned which leave the scope of wasteful and unnecessary expenses on the part of department leading to loss for the company.
- Another benefit of zero based budgeting is that in case of normal budget methods departmental head get complacent because they know that they will get the budget equal to or more than previous year budget which is not the case in zero-based budget where departmental heads are on toes and looking for justifying each and every expense so as to get the desired budget.
Disadvantages of Zero based budgeting
- The biggest disadvantage of zero based budgeting is that it is very time consuming because every year department has to prepare the new budget and top management also has to devote time so as to verify and pass the budget which in turn lead to wastage of time on the part both department as well as top management.
- Another limitation of zero based budgeting is that it can be a tedious task to justify all the expenses and non-justification of expense even though it is genuine may lead to rejection of the budgeted expense which ultimately will affect the company’s performance.
- As far as implementation part of zero-based budgeting is concerned it faces tough challenges in the form of lack of acceptance by the employees, in some departments like research and development, it would be difficult to justify every expense, ignoring expenses which are good for long-term and so on.
As one can see from the above that zero-based budgeting has benefits as well as limitations and any company thinking about implementing this technique should carefully analyze benefits as well as a limitation and then take a decision.