Cut costs using Zero Based Budgeting

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If you are looking to cut costs, as most businesses are, why not prepare your next budget using the zero based budgeting technique? Zero based budgeting involves preparing a budget for each department from a zero base.

Zero based budgeting asks questions like

• Does this activity need to be carried out?
• What would happen if this activity was not carried out?
• Does the activity benefit the organisation?
• Are there alternative ways of achieving the same result?
• How much should the activity cost?
• Is the expenditure worth the benefits?

Using the zero based budgeting approach you would start each budget period afresh not based on historical data. The budgets are zero unless managers make a case for resources; this means each activity is questioned as if it were new before any resources are allocated to it. Each plan of action has to be justified in terms of total cost involved and total benefit to accrue, with no reference to past activities.

The benefits of zero based budgeting are;

• It prevent budgets creeping up each year with inflation 
• It makes it possible to identify and remove inefficient and obsolete operations
• It removes wasteful expenditure

It’s use though, is both labour and time intensive, but this method of budgeting should be considered when you are preparing your yearly budgets if not for the whole organisation it might be beneficial for certain areas of your business.

Deirdre McDermott is Director - OSK Audit.

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