10 Zero-Based Budgeting Advantages and Disadvantages: What You Need to Know
If you are a finance-minded person, you must have heard of Zero-Based Budgeting; this article, therefore, seeks to explain side by side the advantages and the disadvantages.
Knowing as well as understanding the advantages and the disadvantages of Zero Based Budgeting will help you make an informed decision and choice with regards to using this form of Budgeting.
Now, let us look at what is Zero-Based Budgeting before delving into the Advantages and Disadvantages.
What is Zero-Based Budgeting?
Let’s look at an overview of Zero-Based Budgeting here. Zero-Based Budgeting is abbreviated as ZBB in case you see the acronym ZBB, it still stands for the same thing.
As the name implies, Zero-Based Budgeting is an approach to plan and prepare the budget from the scratch. Zero-based budgeting starts from zero, rather than a traditional budget that is based on previous budgets.
Zero-based budgeting forces managers to think about how every dollar is spent in every budgeting period. Just like every other accounting practice, it has advantages as well as disadvantages.
5 Advantages of Zero-Based Budgeting
- Zero-Based Budgeting Keeps you informed about your Cash Flow.
You become aware of how much is coming in and going out of your account each month. This makes it easy for you to stop spending credit-wise.
- Keeps Legacy Expenses in Check
Zero-based Budgeting will help in preventing misallocation of resources. In traditional budgeting, legacy costs may not be examined for years until there is some sort of economic shock that forces the company to take extreme actions.
- In Zero Base Budgeting, you can customize the budget to fit your specific need.
With Zero-Based, you can actually customize it to meet your need. This advantage makes it a lot easier to keep corporate legacy expenses in check. Traditional budgeting might not examine this issue for several years, waiting until an economic shock disrupts the system.
- It Indicates places that you need to make improvements every month.
With traditional budgeting, you might not really know where and how to make improvements. You’ll then analyze expenses for the month, quarter, or year to ensure that every spending habit comes from a necessary place and provides a tangible benefit in some way.
- It identities opportunities for outsourcing
The Zero-Based Budgeting Technique forces people to curtail their spending habits. You must have a reason to make a purchase. That’s why this method facilitates an effective delegation of authority, especially from a corporate viewpoint. Instead of having money move unpredictably based on dozens of different perspectives, you can have one group or team in control of the decisions.
5 Disadvantages of Zero-Based Budgeting
- Zero-Based Budgeting System is Resource Intensive.
Zero-Based Budgeting takes a lot more time and effort to closely review and justify every budget element rather than modify an existing budget and review only new elements.
- Manipulation by Savvy Managers.
Managers who are Savvy can actually game nature. If this happens, it can lead to a change in culture where there is a decreased spirit of cooperation in the company, as workers feel expendable.
- Can Reward Short-Term Thinking
The major disadvantage of Zero-Based Budgeting is that it can reward short-term thinking by shifting resources toward areas of companies that will generate revenue over the next calendar year or budgeting period. This might hurt a company because most areas won’t be generating revenue in the near term, they’re often the keys to remaining competitive over the long term.
- Bedeviled with unpredictable Income
Zero-Based Budgeting is best implemented with a stable a predictable source of income. If you work as a freelancer, in the gig economy, or as an independent contractor, then you never know how much money to allocate each month. Even hourly workers with fluctuating schedules can encounter this disadvantage.
- Zero-Based Budgeting Requires Financial Skills to Implement
You will need a whole lot of financial skills to be able to implement the Zero-based Budgeting System. If that is not available within a household, then there isn’t a way to implement this method successfully. You can always take time to learn how to manage finances like this from industry experts, but then that means you’re taking another commitment that you may not have time to manage.
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In this article, you have seen the definition of Zero-Based Budgeting as well as the Zero-Based Budgeting Advantages and Disadvantages. We believe that you have gotten the key giveaway concerning Zero-Based Budgeting Advantages and Disadvantages.
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