What Is Zero-Based Budgeting?
Learn what zero-based budgeting means in A Level Business, how managers justify each cost, and how it differs from incremental budgeting, with a clear example.
Zero-based budgeting is a method of setting a budget in which every planned expense must be justified from the start of each budgeting period. Managers do not automatically receive the same budget as last time. They explain what they need to spend, why they need it and how it supports the business’s objectives.
How it works
A budget is a financial plan for a future period. With zero-based budgeting, a manager begins with no spending approved and builds a proposal for the activities they plan to carry out. Senior managers then assess those activities and decide which costs to approve. The process is repeated for each new budgeting period, so previously approved costs must be considered again.
For example, suppose a marketing manager proposes spending 12,00012{,}00012,000 pounds on online adverts, 3,0003{,}0003,000 pounds on customer research and 5,0005{,}0005,000 pounds on events. The proposed budget is:
12,000+3,000+5,000=20,000 pounds. 12{,}000+3{,}000+5{,}000=20{,}000\text{ pounds}. 12,000+3,000+5,000=20,000 pounds.The manager must justify each item. If the events are unlikely to help meet the business’s objectives, the business might approve the adverts and research but leave out the 5,0005{,}0005,000-pound event cost. The approved budget would then be 15,00015{,}00015,000 pounds. This is a decision about which activities are worth funding, not simply an instruction to reduce every cost by the same amount.
Why use it?
Zero-based budgeting can help a business identify unnecessary spending and direct money towards its current priorities. This is particularly useful when circumstances have changed and last year’s spending is no longer a reliable guide. However, reviewing every proposed cost takes time, and managers may find it difficult to predict the benefits of some activities.
Common mistake: “Zero-based” does not mean the business intends to spend nothing. It means spending starts with no automatic approval: costs are added to the budget when they can be justified. This differs from incremental budgeting, which uses an existing budget as the starting point and adjusts it.
