Zero-based budgeting

The Zero - base budgeting and zero base budgeting is an analysis and design method that is used in cost management. Here is the budget from scratch planned ( Planning from Base Zero ). This is in contrast to the usual planning emanating from the currently existing budget. The Zero - base budgeting was developed by Peter A. Pyhrr in the seventies.

Background

The budget for the coming period are to be planned for the departments of a company or as part of the negotiation of public budgets. Often the allocation basis is the current budget. Although this method is simple, but it can to enormous inefficiencies arise. No department tries their need for subsidies to reduce, as it is "punished" in the next period for that.

Method

Each department needs to define several measures for the coming period. These measures can have different alternatives. (eg market study carry: minimum, normal, special solution). Thereafter, the action priorities assigned ( ranking). The total budget will be allocated to the most important measures, until it is consumed. Particularly important measures are executed with the special solution, rather unimportant measures with the minimum solution.

Assessment

The constant rethinking of the measures it is less common to inefficiencies in the departments. An extension of the overall budget at any time and does not mean new mapping effort. However, the total cost of this method is significantly higher than conventional allocation method. Frequently also prevail among the employees defense mechanisms and skepticism, as they have now over and over again to prove and justify their budget needs. Therefore, there is in practice often compromises between the Zero Base Budgeting and the conventional allocation.

Benefits

• Resource allocation
• Cost savings
• Promotes communication within the company

Disadvantages

• Subjective assessment of the ranking
• Interaction between the units are not included