Why would a company use zero-based budgeting?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Zero-based budgeting is a budgeting process in which each year's budget is created from scratch.  This is as opposed to systems in which the previous year's budget is taken as a starting point and adjustments are made from that base.  A firm might use zero-based budgeting if it wishes to restrain growth in its spending and if it wishes to do a better job of allocating its resources to those areas in which they are most needed.

In other types of budgeting, decisions are made largely based on what has already happened in the past.  It is much harder to reallocate resources in other bugeting processes because the assumption is that each area of the firm will receive the same (or higher) levels of resources as it did in the previous year.  By using zero-based budgeting, a firm is encouraged to look clearly at all of its operations each year so as to really evaluate how much in the way of resources should go to each operational area.  This can give the firm the best possible chance of using its resources in the most efficient way.

Please follow the link for a much more detailed discussion of the pros and cons of zero-based budgeting.

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