What Is the Zero-Based Budgeting Method?

You can’t run a successful business without budgeting. All businesses have expenses. Allowing your business’s expenses to go unchecked will inevitably cut into its profits. If your business’s expenses are greater than its revenue, in fact, you may struggle to make a profit. While there are different budgeting methods available, though, you may want to use the zero-based budgeting method.

Overview of the Zero-Based Budgeting Method

The zero-based budgeting method involves the manual approval of all expenses for each accounting period. It was developed in the 1970s by former Texas Instruments accounting manager Peter Pyrhrr. Pyrhrr discovered that by using the zero-based budgeting method, he was able to better allocate funds.

It’s known as the “zero-based budgeting method” because it assumes a zero-dollar budget at the beginning of each accounting period. Each department will then submit a proposal for its expected expenses during that period. Approved expenses are added to the business’s budget. Rejected expenses, on the other hand, are not. The zero-based budgeting method simply assumed a zero-dollar baseline for each accounting period. The business’s budget for a given period is calculated based on expense proposals submitted by various departments.

Advantages of Using the Zero-Based Budgeting Method

When compared to other budgeting methods, the zero-based budgeting method is easier to use. It’s so easy to use, in fact, that many people use the zero-based budgeting method for their personal finances. Whether you want to create a budget for your business or personal finances, you may want to use the zero-based budgeting method. It involves manually identifying and approving each expense for each accounting period.

Your business may save money by using the zero-based budgeting method. Traditional accounting methods typically don’t involve manually approving each expense. As a result, they force businesses to pay for unnecessary expenses. If you use the zero-based budgeting method, however, you’ll have the opportunity to approve each expense for each accounting period. The end result is lower expenses that drive higher profit margins for your business.

You can focus your business’s finances on products and services that drive revenue with the zero-based budgeting method. Not all expenses are equal. Some of them will drive more revenue than others. Using the zero-based budgeting method will allow you to selectively choose which products and services your business will purchase during a given accounting period. The end result is lower expenses and higher revenue.

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