Zero- base budgeting is a planning system for the expenses f a project where one assumes a budget of zero. After considering zero costs of the projects, one needs to make several adjustments, re-evaluating the budget request thoroughly starting from the zero -base. Under zero-base budgeting, there is no base year that one needs revisit in every annual evaluation. One needs to approve every item of the budget, unlike the other budgeting techniques that only make adjustments on changes. The budgeting technique may also refer to zero-sum budgeting, where the manager budgets every single unit of revenue that the organization receives. The manager will then adjust downwards for every element that requires upward adjustment (G. Bojadziev & M. Bojadziev, 2007).
An example of a company in the United States that employs zero-base budgeting is the Florida Power and Light Company. The company began using the zero -base budgeting technique in 1977 in administering budgets for the various departments within the company. Initially, the company treated older problems with more priority than new problems. This was because management had already budgeted for the old problems, unlike the new company problems that the company was in the initial stages of budgeting. However, since the company adopted the zero-base budgeting technique, it always treats all problems, both old and new, with the same attention. According to reports from research institutions, the director of the light company claimed that the budgeting technique has been effective in terms of controlling costs (Gianakis & McCue, 1999).
Why the Budgeting Technique Is Appealing
The zero-base budgeting technique is appealing to many managers mainly because of the way it helps in minimizing costs. As it is evident in the Florida Power and Light Company, zero- base budgeting requires managers to consider every single unit of income that the company gets as revenues. The method enhances a high degree of accountability from the management of any organization.
Advantages and Strengths of Zero-Base Budgeting Technique
Zero-base budgeting has several strengths
First, the technique ensures high levels of efficiency in terms of allocation of resources. This is the case because the technique bases its resource allocation on current needs and benefits of a project, unlike other techniques that base their allocations on historical data.
Secondly, the technique acts as an impetus to managers to look for cost effective ways of improving the operations of a company. Zero-base budgeting aims at accounting for every unit of revenue available. Thus, management has to come up with cost effective ways of running the company’s daily routines.
The technique also fosters motivation of staff by providing workers with an initiative and responsibility in making critical decisions within the organization (Dropkin, Halpin & Touche, 2008).
The method also fosters effective communication and co-ordination within the company. Accountability requires that there is transparency in the running of affairs within the various departments of a company.
The method also makes management look for avenues of outsourcing.
Weaknesses of Zero-Base Budgeting
Most companies have claimed that the budgeting technique is time consuming and extremely labor intensive. This is because the technique requires critical examination of each program in the project.
Secondly, the method is usually problematic when it comes to justification of every line element of the project, especially for departments that have intangible inputs.
Another weakness of zero-base budgeting is that it is extremely complex that it requires training. Training of staff is always costly for upcoming firms that are striving to cut on costs as a means of raising revenue.
Lastly, the method may be ineffective for companies that operate on a global scene, since the information that backs up the process of budgeting may be overwhelming (G. Bojadziev & M. Bojadziev, 2007).
In conclusion, companies that are in the development stage are best suited for a zero-base budgeting technique. This is because such a company does not have an immense information bank that is a disadvantage to this technique. Similarly, the method will ensure a high level of creativity within management.