Zero-Based Budgeting - ZBB

A A A

DEFINITION

A method of budgeting in which all expenses must be justified for each new period. 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.

ZBB allows top-level strategic goals to be implemented into the budgeting process by tying them to specific functional areas of the organization, where costs can be first grouped, then measured against previous results and current expectations.

INVESTOPEDIA EXPLAINS

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 production; their contributions are more easily justified than in departments such as client service and research and development.


RELATED TERMS
  1. Budget Deficit

    A status of financial health in which expenditures exceed revenue. The term ...
  2. Budget Manual

    A set of instructions used within large organizations to prepare budgets. As ...
  3. Activity-Based Budgeting - ABB

    A method of budgeting in which the activities that incur costs in every functional ...
  4. Cash Budget

    An estimation of the cash inflows and outflows for a business or individual ...
  5. Expense

    1. The economic costs that a business incurs through its operations to earn ...
  6. Financial Accounting

    The process of recording, summarizing and reporting the myriad of transactions ...
  7. Supply Chain Management - SCM

    Supply chain management is the streamlining of a business' supply-side activities ...
  8. Budget

    An estimation of the revenue and expenses over a specified future period of ...
  9. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production ...
  10. Balanced Budget

    A situation in financial planning or the budgeting process where total revenues ...
Related Articles
  1. 6 Months To A Better Budget
    Budgeting

    6 Months To A Better Budget

  2. The Beauty Of Budgeting
    Budgeting

    The Beauty Of Budgeting

  3. Run Your Finances Like A Business
    Entrepreneurship

    Run Your Finances Like A Business

  4. Mortgages: Fixed-Rate Versus Adjustable-Rate
    Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

  5. Why Some Kids Never Leave The Nest
    Budgeting

    Why Some Kids Never Leave The Nest

  6. 5 Things You Shouldn't Do During A Recession
    Budgeting

    5 Things You Shouldn't Do During A Recession

  7. A Day Without Spending, A Lifetime's ...
    Budgeting

    A Day Without Spending, A Lifetime's ...

  8. Debt Consolidation: When It Helps, When ...
    Credit & Loans

    Debt Consolidation: When It Helps, When ...

  9. How do I lower my debt-to-income (DTI) ...
    Credit & Loans

    How do I lower my debt-to-income (DTI) ...

  10. How To Keep Debt Low
    Credit & Loans

    How To Keep Debt Low

comments powered by Disqus
Hot Definitions
  1. National Best Bid and Offer - NBBO

    A term applying to the SEC requirement that brokers must guarantee customers the best available ask price when they buy securities and the best available bid price when they sell securities.
  2. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an investor has bought securities on margin, the minimum required level of margin is 25% of the total market value of the securities in the margin account.
  3. Leased Bank Guarantee

    A bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer looking to secure a bank guarantee, then lease a guarantee to that customer for a set amount of money and over a set period of time, typically less than two years.
  4. Degree Of Financial Leverage - DFL

    A ratio that measures the sensitivity of a company’s earnings per share (EPS) to fluctuations in its operating income, as a result of changes in its capital structure. Degree of Financial Leverage (DFL) measures the percentage change in EPS for a unit change in earnings before interest and taxes (EBIT).
  5. Jeff Bezos

    Self-made billionaire Jeff Bezos is famous for founding online retail giant Amazon.com.
  6. Re-fracking

    Re-fracking is the practice of returning to older wells that had been fracked in the recent past to capitalize on newer, more effective extraction technology. Re-fracking can be effective on especially tight oil deposits – where the shale products low yields – to extend their productivity.
Trading Center