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Zero-based budgeting How does it work?

Apriel finance

Zero-based budgeting

Zero-based budgeting (Zero-based budgeting) is an approach in budgeting in which each expenditure must be justified from the beginning without relying on previous budgets. In conventional budgeting, the next budget is generally based on the previous year's budget, with minimal adjustments.

In Zero-based budgeting, the budgeting process starts from zero, where each activity or expense must be re-justified. This forces managers and departments to identify and reevaluate their needs and priorities thoroughly.

How zero-based budgeting works involves several stages, including:

1. Identification of activities:

managers and departments should identify all the activities necessary to achieve the objectives of the organization. Each activity must be clearly defined and given priority.

Identification of activities zero-based budgeting is the process of identifying and evaluating each program or activity within an organization's budget by starting from scratch and without assuming that the program should get funding in a certain amount. The goal is to ensure that any program or activity really needs and provides benefits that are worth the cost. Here are the steps in how to identify zero-based budgeting activities:

A. Review organizational goals:

the first step is to understand the overall goals and strategies of the organization. It is necessary to ensure that any proposed program or activity is still relevant to the mission and vision of the organization.

B. Identify existing programs and activities

make a complete list of all programs and activities that are currently in the budget. This can include special projects, departmental initiatives, and other routine activities.

C. Evaluation of benefits and costs:

for each program or activity, identify and evaluate the resulting benefits as well as the associated costs. The question to ask Is: What are the direct and indirect benefits provided by this program? How much does it cost to run the program?

D. Compare with alternatives:

after understanding the benefits and costs of each program or activity, compare with other alternatives that may exist. For example, is there a more efficient or more effective way to achieve the same goal at a lower cost?

E. Prioritize the most important programs or activities:

based on the evaluation of benefits and costs and comparison with other alternatives, prioritize the programs or activities that are considered the most important and provide the greatest benefit according to the organization's objectives.

F. Create a new budget:

after identifying the programs or activities that will be prioritized, use the information that has been collected to create a new budget. Make sure that each program or activity gets a realistic allocation of funds and is proportional to the expected benefits.

G. Continue to monitor and evaluate:

the last step is to continue to monitor and evaluate each program or activity that has been established in the budget. There needs to be a mechanism that allows for changes and adjustments if needed to keep the budget relevant and effective over time.

By following these steps, the organization can carry out the identification of zero-based budgeting activities to ensure that the available resources are used efficiently and effectively in achieving the desired goals.

2. Goal setting:

each activity must be linked to the strategic objectives of the organization. These goals must be Specific, Measurable, Achievable, Relevant, and time-limited (SMART).

Goal setting in Zero-based budgeting (Zero-based budgeting) involves the process of setting clear goals for each program or activity in the budget based on the evaluation of needs and expected benefits. Here are the ways of goal setting in zero-based budgeting:

A. Review organizational goals and strategies

the first step is to understand the goals and strategies of the organization as a whole. The objective should be a guide in setting the objectives of each program or activity in the budget. It is important to ensure that the budget supports the direction desired by the organization as a whole.

B. Needs evaluation:

for each program or activity, evaluate the needs that must be met for the goal to be achieved. The question to ask is: what must be done or obtained to achieve the goal? How many resources are needed? Are the alternatives more efficient or more effective?

C. Set specific and measurable goals:

after evaluating needs, set specific and measurable goals for each program or activity. Goals must be clear and measurable so that progress can be objectively assessed. For example, a specific goal could be a 10% reduction in costs or a 20% increase in efficiency.

D. Consider priorities and linkages:

when setting goals, consider the priorities of each program or activity at hand. Ensure that more important goals get greater attention and resource allocation. In addition, pay attention to the relationship between programs or activities with one another. Make sure that the goals set are consistent and reinforce the overall goal.

E. Communicate goals clearly:

after setting goals, it is important to communicate those goals to all parties involved. This includes management, the implementation team, and other relevant parties. Clearly communicate the goals to be achieved and why they are important in achieving the organization's strategy.

F. Follow - up and evaluation:

define methods for follow-up and evaluation of the achievement of objectives. Establish clear performance indicators to measure progress and results achieved. If needed, make changes and adjustments along the way to ensure that goals remain relevant, achievable, and appropriate to changing environments.

By following these steps, organizations can set clear and measurable goals in zero-based budgeting. This allows for more effective planning, wiser use of resources, and achieving the expected results in achieving organizational success.

3. Alternative assessment: managers and departments need to evaluate existing options and alternatives to achieve set goals. Each option should be assessed based on its efficiency, effectiveness, and impact on the organization's goals.

Assessment of alternatives in zero-based budgeting (Zero-based budgeting) involves the process of analyzing and evaluating each alternative that exists to achieve the goals set in the budget. Here are alternative ways of scoring in zero-based budgeting:

A. Identify alternatives:

the first step is to identify possible alternatives to achieve the set goals. These alternatives can include a variety of different approaches, strategies, or options to achieve the desired results. For example, if the goal is to increase production efficiency, alternatives may include investment in new technologies, changes in production processes, or outsourcing.

B. Evaluation of benefits and costs:

once the alternatives have been identified, the next step is to evaluate the benefits and costs of each alternative. Consider the expected benefits or outcomes of each alternative, such as cost savings, improved quality, or increased productivity. Also evaluate the costs associated with each alternative, including initial investment costs, operating costs, or training costs.

C. Comparative analysis:

after gathering information about the benefits and costs of each alternative, perform a comparative analysis to compare one alternative with another. Evaluate the relative advantages and costs of each alternative to find out which alternative has the highest value or is the most profitable. This evaluation may involve calculating appropriate ratios or comparisons, such as cost - benefit ratios or ranking alternatives based on certain criteria.

D. Consider the risks and sustainability:

in addition to the benefits and costs, also consider the risks and sustainability of each alternative. Evaluate risk factors such as economic uncertainty, regulation, or changes in market conditions that may affect the implementation of alternatives. Also consider sustainability factors, such as the environmental, social, and long-term sustainability impacts of each alternative.

E. Choose the best alternative:

after evaluation and analysis, choose the alternative that has the greatest benefit at an affordable cost, well-managed risks and high sustainability. The chosen alternative must comply with the objectives established in the budget and be able to give the expected results.

F. Establish follow-ups:

after choosing the best alternative, establish the necessary follow-ups to implement that alternative in the budget. This involves determining the allocation of necessary resources, implementation schedules, and methods of measuring progress and results. Also ensure that there is a monitoring and evaluation mechanism to ensure that the chosen alternative is successfully achieved.

By following these steps, organizations can conduct a systematic and objective assessment of alternatives in zero-based budgeting. This allows organizations to choose the most profitable and efficient alternatives to achieve their goals.

4. Budgeting:

once alternatives and options are evaluated, a budget can be drawn up based on priorities and needs. Each activity should be budgeted based on detailed cost estimates and based on goals, priorities, and needs.

Zero-based budgeting involves a different approach than traditional budgeting methods. Here are some steps that can be followed in drawing up a zero-based budget:

A. Identification of objectives:

the first step is to identify the objectives of the organization or department that will be achieved through the budget. This objective should be clear and specific to give a clear direction in the budget preparation process.

B. Review priorities

n zero-based budgeting, there is no basic assumption that existing spending should be maintained. Thus, the next step is to review the existing spending priorities. Identify and reevaluate any existing activities and costs from scratch, without considering the previous budget.

C. Needs analysis:

needs analysis involves an assessment of the activities required to achieve a set goal. Consider what to do, how many resources are needed, and the effectiveness of the activity. Ask questions like "Should we do this?", "How much do we need?", and "is there a more efficient alternative?".

D. Resource allocation determination:

after analyzing the needs, determine the allocation of resources required for each activity or program. Allocate resources based on the priority and effectiveness of each activity. Ensure that the allocation of these resources is in line with the organization's goals and strategy.

C. Re-evaluation and prioritization:

after establishing the allocation of resources, re-evaluate each budget that has been prepared. Consider savings or efficiency measures that can be implemented. If excess budget is found on some activities, reallocate these resources to other activities that are more priority.

E. Coordination and implementation:

after drawing up the budget, coordinate with all relevant parties, such as department managers and staff. Make sure all parties understand and agree with the budget that has been compiled. Next, implement a budget by monitoring resource usage and taking progress measurements. Provide reports on a regular basis to ensure the budget remains under control and in accordance with the initial objectives.

By following these steps, organizations can craft a more effective and efficient zero-based budget. A zero-based approach allows organizations to proactively evaluate and prioritize the use of their resources, thereby achieving higher efficiencies and allocating resources more effectively.

5. Monitoring and control:

after the budget is drawn up and approved, strict monitoring and control of expenditure is carried out. Progress and performance should be tracked on a regular basis to ensure compliance with the budget and achieving the set goals.

Monitoring and control is an important step in Zero-based budgeting (Zero-based budgeting) to ensure the budget remains in accordance with the plans and objectives that have been set. Here are some ways to monitor and control zero-based budgeting:

A. Create an effective reporting system:

create a reporting system that allows managers and staff to regularly report on budget usage and project progress. In this reporting system, make sure there are columns to report the initial budget, the budget used, and the remaining budget. This system should be simple, easy to understand, and can provide accurate information.

B. Monitor budget usage regularly:

perform regular monitoring of budget usage and project progress. Compare the budget that has been compiled with the actual expenditure. If there is a significant difference between the initial budget and the actual use, it is necessary to evaluate and correct it.

C. Perform a variant analysis:

perform a variant analysis to compare between the initial budget and actual usage. Identify the cause of the variance, whether caused by changing conditions, errors in estimates, or inefficient use of resources. By understanding these variants, managers can take appropriate action to improve budget usage.

D. Establish control measures:

identify the control measures necessary to ensure the use of the budget remains as planned. For example, it may include limiting spending to individual departments, tightening approval of additional budgets, or monitoring and controlling inventory and warehousing.

E. Conduct internal audits:

periodically, conduct internal audits to check compliance with budgets and project progress. This Audit should be conducted by an independent party and has expertise in budgeting and Budget Control. Audit results can provide valuable insights for budget improvement and refinement.

F. Make continuous improvements:

whenever there are problems or errors in the use of the budget, make continuous improvements. Review the budgeting process, identify weaknesses, and determine corrective measures. Evaluate the organization's strategy and goals, and learn from past experiences to improve the budgeting process in the future.


By using a zero-based budgeting approach, organizations can focus more on actual needs and distribute funds more efficiently. It also allows managers to identify areas of expenditure that are ineffective or unnecessary, so that they can be diverted to more important activities and provide greater added value.


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