Zero Based Budgeting Pros Cons 2021

Question

What are the strengths and weaknesses of zero-based budgeting?

Answer

Zero-based budgeting in financial management accountinginvolves evaluating each line item from the department cash flow statement andjustifying each expected expenditure for the future year (Brown et al.). The zero-basedbudgeting method bases the expenses for the new period on the actual expected expensesand not on an incremental factored basis.

The advantage with zero-based budgeting involvescreating a concise and clear picture of costs versus desired performance andhelps with potential cost savings. Accuracy and purposefulness from zero-basedbudgeting eliminates arbitrary changes to the budget from the previous year andrequires each department to review, question, and justify each cash flow item andcompute the expected operation costs based upon the market and other internaland external needs/factors (Brown et al.). This method helps budget efficientallocation of resources to each department since the budget numbers are basedupon actual expected costs rather than historical numbers (Brown et al.). Zero-basedbudgeting often leads to the identification of cost-saving opportunities and alternativesby removing unproductive and/or redundant department activities. Budget slackor inflation rarely exists in zero-based budgeting since each line item must bejustified (Brown et al.). Zero-based budgeting method allows for a decisive andpurposeful evaluation of each item and improves coordination and communicationswithin the departments because employees are motivated by involving them in thebudget preparation (Brown et al.).

Although the zero-based budgeting objective of reflecting the true expenses to be incurred by a department provides merits, the work involves a complex and time-intensive exercise (Brown et al.) and large manpower expenditures to complete. Zero-based budgeting overlooks costs incurred in previous years and subjects the process to internal conflicts and backroom dealing by managers (Brown et al.). Preparing a budget from the scratch involves many employees, requires training for the employees and managers and the departments may lack the available time and workers to complete the necessary activities adequately. With the focus only on expected costs in the upcoming year, zero-based budgeting places more emphasis on the short-term budgets at the expense of long-term plans (Brown et al.). The process identifies underperforming departments that might require elimination, but in the case of athletics these departments maybe necessary for the organization (Brown et al.). It appears that although time-intensive and difficult, zero-based budgeting maybe the desired and possibly more lucrative method for budgeting.

CitedWorks

Brown,M. T., Rascher, D. A., Nagel, M. S., & McEvoy, C. D. (2017). Financial Management in the Sport Industry.Routledge. New York, NY.