How Zero Based Budgeting works

By taking a simple example, we can teach you, "How zero based budgeting works?" Suppose, you have small business. Your business's 2 weeks incomes is 1600 $. Now forget previous two months income. You just start to justify only $ 1600 with your two weeks estimated all expenses. In the end this 2 weeks period, you should have only zero dollar. You have started from previous 2 weeks as zero base in income and expenses and you reach your total estimated incomes also zero level by estimating any expenses of your business.

1st Step : Start to Making Base As Current Period Estimated Incomes

First of all, you have to make the base of current period estimated incomes for understanding the work of zero based budget. In above example, we have estimated $ 1600 as our current two weeks incomes.

2nd Step : Estimate Your All Operating Expenses 

In our small business, for example, we have estimated for two weeks.

Expenses  One Month in $                2 weeks in $
Rent  700 350
Utilities 200 100
Fuel 100 50
Charity 40 20
Festival expenses 100 50
Expenses for employees' Training 40 20
Expenses for employees' entertainments 40 20
Salaries 60 30
Refreshment 400 200
Total  1680 840

3rd Step : Estimate Your All Financial Expenses

For promoting business, you need debt. For debt, you have to pay its installments. This is compulsory payments.  Following may be our business.

Financial Expenses Estimation 
Debt         Total Taken  2 Weeks Installment 
                  ( In $ )                                 (In $ )
Car loan 4000 130
Business loan 95000 80
credit card - 1 3000 30
credit card -2 2000 20
Total  104000 260

4th Step : Deduct All the Expenses From Your Estimated Income For Making Estimating Incomes as Zero

If your estimating is more than your estimating incomes, you have to decrease your expenses. If you income is more than your estimated expenses. Again see the expenses list, you can add more expenses. You can pay more installments or you can save. With this, your estimating incomes will go to zero. So, every period, your budget will start from zero expenses and end of your period, your all estimated incomes will reach at zero. So, such a way, zero based budget works. 

You can see it in screenshot also. 


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Accounting Education: How Zero Based Budgeting works
How Zero Based Budgeting works
Accounting Education
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