What is zero-based budgeting?

“Zero-based budgeting is a great exercise for figuring out your spending versus your take-home pay,” says Zhao, even if you end up transitioning to another budgeting framework once you’ve got a handle on this. It can be especially helpful for those whose financial situation has changed recently. Finally, take your spending and saving targets and subtract them from your monthly income. By requiring a fresh evaluation of all expenses, Pyhrr aimed to eliminate unnecessary costs, identify inefficiencies, and promote a more focused use of resources. His goal was to instill a sense of accountability and ownership among budget holders, encouraging them to critically analyze and justify their budget requests.

This leads to substantial cost reductions and, ultimately, contributes to a healthier bottom line. Choose a free template or app, like Goodbudget or EveryDollar. Or sign up for a paid tool, like You Need A Budget or Tiller (both allow a free trial).

  • If it’s landing in your bank account and you could be tempted to spend it, write it down.
  • Zero-based budgeting (ZBB) starts from a different premise.
  • It’s a set of systems that, first, give you visibility to where you’re spending money and where your resources are today and allows you to compare that to where they should be [Exhibit 1].

With this, every dollar finds its purpose in the grand scheme of finances. Get ready to take your procurement budgeting game to the next level! In this article, we’re diving headfirst into the exciting world of zero-based budgeting. Say goodbye to financial guesswork and hello to a budgeting strategy that’s as thrilling as it is effective.

Subtract your expenses from your income to equal zero.

In addition, the process can be gamed by savvy managers to get more resources into their departments. 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. If you have money left over, you’ll need to assign those dollars to a category. If you’re in the negative, you’ll need to go through your expense categories and subtract money to get your budget back to zero. Start with debt repayment first and look at the minimum payments due for student loans, car loans, credit cards, personal loans or other debts. If you’re used to paying more than the minimum, you may need to scale back if you have less money to budget because of Covid-19.

He believed that organizations needed a more rigorous approach to budgeting that would ensure resources were allocated efficiently and aligned with strategic objectives. The decision about whether to roll ZBB out company-wide versus in individual business units or regions is mostly driven by specific business needs. One global food producer did a country-by-country rollout because it had four or five different business units, with a lot of synergies, that had never really been integrated or captured.

In this environment, ZBB—as a structured approach—may be appealing to some companies simply because it is better than nothing. Because a new budget blog xero.nu is developed each period, the time cost involved may not be worthwhile. Instead, using a modified budget template may prove more beneficial.

How to create a zero-based budget

I’ve been sitting here at my keyboard staring into space, trying to think of one single disadvantage to operating with a zero-based budget. You need to have a serious and visible commitment from top management as you’re embedding the new ways of working. The value of your investment will fluctuate over time, and you may gain or lose money.

And on the far right, you have this individual playing the role of a co-owner. A coach is there to inform or guide and help share best practices. A co-owner is designed to do all that but also to have joint accountability for, and a say in, the spend decisions in that area. What the news means for your money, plus tips to help you spend, save, and invest.

What are the advantages and disadvantages of ZBB?

Zero-based budgeting approach enables organizations to quickly respond to these changes. With zero-based budgeting, you might find that your budget fluctuates significantly between periods. Because the budgets are not determined from past ones, it’s possible that this year you have $80,000 and $55,000 on the next. Because you only budget the amount of money in your account, you limit your spending to the money you have. A zero-based budget is a helpful tool for those prone to overspending.

This approach can be myopic and, over time, it can lead to significant misallocation of resources. If done correctly, zero-based budgeting can prevent this from happening. It has a bad reputation for being a complete cost cutting exercise, but ZBB an help you align spend to more revenue generating opportunities. ZBB offers a number of advantages, including lower costs, budget flexibility, and strategic execution. When every expense is carefully scrutinized, the highest revenue-generating activities are prioritized.

What Is Zero-Based Budgeting? Meaning, Process, and Examples

You can use budgeting apps like Mint or You Need a Budget (YNAB), a spreadsheet, or a notebook to create and track your zero-based budget. You then allocate $1,500 to savings so you can build your emergency fund and buy a house some day. The last $500 goes toward eating out, shopping, gas, travel, or anything else you may want and can afford. You can also adapt your zero-based budget as you go through the Baby Steps. That’s it for making the zero-based budget, but we’ve got two more steps that’ll help you actually stick with it.

Add Up Other Monthly Spending and Savings

Your regular paychecks and anything extra you plan to bring in during the month (think side hustles or child support). That’s your total monthly income, aka what you’ve got to work with this month. Before you start making your zero-based budget, log in to your bank account or grab those bank statements out of your drawer. They come in handy when you’re wondering how much you normally make or spend on stuff. You can also check out these budget percentages and averages. Following a zero-based budget eats up quite a bit of time.

We’re also joined by Kyle Hawke, who’s a McKinsey partner based in Washington, DC. Even when you stick exactly to your plan, not every expense is predictable, which is part of what makes having an emergency fund so important. Set a target amount you want to spend in each category or subcategory. You should also list how much you aim to save for the month, both in your retirement accounts and your nonretirement savings.

Zero-based budgeting is a more granular process that aims to identify and justify expenditures. However, zero-based budgeting is also more involved, so the costs of the process itself must be weighed against the savings it may identify. It does not take into account the budgets that were created the previous year or the years prior. This means always looking at budgeting with a fresh outlook and not having any assumptions as well as targets from previous years. Following the zero-based budgeting, you need to implement the tasks you deem to be most important and follow the budget as you created it. After the period is over, you need to measure the real result with the expected results to determine if the goals are achieved.

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