Do Zero Based Budgets on Focus on Short Term Goals?
Zero based budgets can be a great way to beat the sawdust out of a budget. The principles of zero based budgeting are pretty simple. Each year or month that you prepare a budget, start with zero information. Starting with zero information, instead of using comparables from previous months or years, forces the preparer to be savvy and understand the true basis of their budget.
- Important historical information might be ignored.
- Labor intensive.
- Can be short sighted.
- Shakes the saw dust out the budget.
- Short term budgeting can make companies more focused.
- Flexible budgeting, since less historical information is used.
- Encourages new projects. Because new projects are on equal footing with old projects, they will have a better chance of being included.
In any budgeting scenario, a manager can manipulate the numbers to suit the story or to get upper management approval. For example if you know that the management team will decrease payroll budgets by 10%, it’s easy to inflate by 10% and get to the number that your department needs.
There are other year to year amounts that can also be eliminated. Zero based budgeting does not do away with those budgeting problems. It’s simply inherent in the management process or budget negotiation.
The main benefit is challenging all the yearly numbers and making it work.
What are other budget preparation methods?
- I’ve seen people take last years actual results, average it out over 12 months and deem that the budget.
- Incremental budgets. (ie. increase everything by 10%)
- Flexible budgets that adjust with sales or manufacturing volume.
- Priority based budgets re-evaluate every project or cost, but management does not start from zero each time.
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