In larger organizations, particularly in government or non-profit organizations, there is a natural tendency to say, "Here is what we spent last year and inflation is going to come in, so we raise these expenses by the inflationary rate." They don’t do zero-based budgeting - they take last years numbers and think about what’s going to be different next year and then all they change are those numbers. Whereas, the zero-based budget says you have a blank sheet every year and every number has to be explained.

No reference is made to the previous level of expenditure. Zero-based budgeting requires the budget request to be justified in complete detail by each division manager, starting from the zero-base. The zero-base is indifferent to whether the total budget is increasing or decreasing.

You can’t just throw a budget together without thinking, when using zero-based budgeting. You really have to think through seriously what you are going to be spending and why. Someone also has to sit down and determine what kind of revenue will be coming in.

A budget has to be thought through and done thoroughly. I believe all expenditures should be justified each year.

Advantage of zero-based budgeting

• Efficient allocation of resources, as it is based on needs and benefits.
• Drives managers to find cost effective ways to improve operations.
• Detects inflated budgets.
• Useful for service departments where the output is difficult to identify.
• Increases staff motivation by providing greater initiative and responsibility in decision-making.
• Increases communication and coordination within the organization.
• Identifies and eliminates wasteful and obsolete operations.
• Identifies opportunities for outsourcing.
• Forces cost centers to identify their mission and their relationship to overall goals.
• it helps in identifying areas of wasteful expenditure and i desired, it can also be used for suggesting alternative courses of action.

Disadvantages of zero-based budgeting

• Difficult to define decision units and decision packages, as it is time-consuming and exhaustive.
• Forced to justify every detail related to expenditure. The R&D department is threatened whereas the production department benefits.
• Necessity to train managers. Zero-based budgeting must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process.
• In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details.
• Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.

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