Zero-Based VS Trend Based Budgeting
Drawing up a budget for your organization can be pretty challenging. For one, you have to choose the right budgeting method, one that’s suitable to your business model and needs. Do you go with the trend-based or zero-based budgeting approach? Before you can make the decision, you’ll need to understand the implications of each method.
What Is Zero-Based Budgeting?
As the name suggests, zero-based budgeting involves coming up with a new budget from scratch, starting from base zero. Each time you’re preparing a new budget, you have to justify each expense anew. To make it into the next budget, each cost must be drilled down into and analyzed to determine its need.
With ZBB, there is no consideration for the previous budget, whether it be lower or higher. This budgeting model aims at forcing the planners to look at the business objectively with a set of fresh eyes each time, without the limitations of past targets and assumptions. It aligns resource allocation with corporate strategy, ensuring money goes only to the activities that add real value.
Why Use Zero-Based Budgeting?
- Zero-based budgeting is structured to optimize cost containment and management. It offers improved accuracy because every penny is accounted for. Budget allocation is based on the needs of every department, with each getting the exact amount of funds and resources it needs.
- There is more efficiency with ZBB because the focus is on current needs and future objectives, as opposed to past results. This way, the resources spent add value and contribute to the strategic objectives of your organization.
- Zero-based budgeting also allows you to eliminate poor values that drain company resources. This way, the business can free up more resources, which can then be utilized in other areas of the business for other critical functions.
- ZBB is an excellent method for aligning the budget with business objectives. With zero-based budgeting, there is a strong tie between how money is spent and the overall business strategy.
With all its advantages, ZBB has been the subject of a long debate because it is undeniably a costly endeavor that often drains the organization’s resources. For this reason, most organizations prefer the more cost-effective trend-based budgeting.
What Is Trend-Based Budgeting?
Trend-based budgeting is a method that’s literally based on trends. You can forecast and plan using current, projected, or past values, estimating the percentage by which all the values are likely to change. It is relatively easy to spot trends in sales projections, marketing, inventory requirements, and more.
Why Use Trend-Based Budgeting?
- Trend-based budgeting is relatively easy to implement. You have everything you need, as opposed to starting from scratch. Financial records from prior periods, including income statements, balance sheets, and cash-flow statements, make planning straightforward.
- This budgeting model allows for flexibility. Using measurable and verifiable data enables you to plan effectively and adjust to prevailing market trends. Flexibility has been a critical determinant of success, especially during the COVID-19 pandemic, when many organizations have had to invest in remote work opportunities for their employees.
Aside from the proper budgeting method, you also need experienced, insightful executive staff. Connect with Ghost Mountain today to discuss any challenges you might be facing. We also have several recruiting options for your executive staffing needs.