What Is Zero-Based Budgeting?

Zero-based budgeting is a type of budgeting that is used by many different companies in the world today. Here are the basics of zero-based budgeting and how it can help you as a company.

Zero-Based Budgeting

With zero-based budgeting, the budget always starts out at zero, for every time period. You start out at zero and then add every expense that you think you might have over the course of a certain time period. For example, you might look at what you expect to spend over the next quarter. Therefore, each individual department in the company has to justify each aspect of their budget for that interval. This requires a much more detailed look at each financial transaction and budget need.

Many companies are turning to this as a way to stay on top of their financial transactions and eliminate wasteful spending. With incremental budgeting, this often leads to employees wasting resources just so they do not lose a significant portion of their budget for the future. With zero-based budgeting, you can be more efficient and come up with the exact figure that you need for each time period. While it is more detailed, it can typically save you substantial amount of money overall.

What is the difference between zero based budgeting and incremental budgeting?

Both incremental and zero-based budgeting are commonly used by companies today. The big difference between these two forms of budgeting is in the starting point. With zero-based budgeting, the company starts at zero every time they make a budget for something. The cost of an item has to be justified every time in order to come up with an exact value to allocate to it. With incremental budgeting, the budget from the previous period is used. The business looks at the previous budget and then adds a certain amount of money to it when creating the new budget.

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