Advantages and Disadvantages of Zero-based Budgeting

557 words (2 pages) Business Question

30th Apr 2020 Business Question Reference this

Tags: FinanceManagementQuestionsBudgets

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Question

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

Answer

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

The advantage with zero-based budgeting involves creating a concise and clear picture of costs versus desired performance and helps with potential cost savings. Accuracy and purposefulness from zero-based budgeting eliminates arbitrary changes to the budget from the previous year and requires each department to review, question, and justify each cash flow item and compute the expected operation costs based upon the market and other internal and external needs/factors (Brown et al.). This method helps budget efficient allocation of resources to each department since the budget numbers are based upon actual expected costs rather than historical numbers (Brown et al.). Zero-based budgeting often leads to the identification of cost-saving opportunities and alternatives by removing unproductive and/or redundant department activities. Budget slack or inflation rarely exists in zero-based budgeting since each line item must be justified (Brown et al.). Zero-based budgeting method allows for a decisive and purposeful evaluation of each item and improves coordination and communications within the departments because employees are motivated by involving them in the budget 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.

Cited Works

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

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