Zero based budgeting is the type of budget in which we take the zero base for estimating the expenditures. Zero base means, we do not see the previous year actual expenditure. If we see the previous year expenditure and try to reduce in current estimation, it may reduce our quality production. So, we keep our base zero and welcome to all important and necessary expenditures in current year budgets and justify as per our estimated income resources.
In other words, budget making team will re-evaluate the estimating incomes and expenditures of current year without just cost cutting of previous or past cost. We work as we started this business in this year. So, we have to analyze the current year inflation. So, we can reach correct estimation of our incomes and expenditures.
Example of Zero Based Budgeting
1st Example :
For example, you have estimated your this current year income as $ 1,00,000. You have to estimated all the expenditure which will be of revenue or capital nature. You will keep your past as zero. It means, you will not estimate $ 80,000 as your expenditure because pervious year estimated expenditure is $ 85000. With this, you will spend $ 20,000 in useless projects. So, left nothing out of $ 1,00,000 and estimate total expenditures of $ 1,00,000. For example, if your revenue expenditures's estimation is $ 90,000. You can estimate the investment of $ 10,000 in SBI Mutual Fund (80% Debt Sources Projects). It can be only possible if you will work on zero based budgeting.
2nd Example :
Benefit of Zero Based Budgeting
Main benefit of ZBB is for Not-Profit organisation, Govt. sector and public sector. If there are more expenses for social welfare, they will not cut it. They will generate more financial resources by donation or tax or equity issue or new issue of currency.
Related : Cash Budgeting
In other words, budget making team will re-evaluate the estimating incomes and expenditures of current year without just cost cutting of previous or past cost. We work as we started this business in this year. So, we have to analyze the current year inflation. So, we can reach correct estimation of our incomes and expenditures.
Example of Zero Based Budgeting
1st Example :
For example, you have estimated your this current year income as $ 1,00,000. You have to estimated all the expenditure which will be of revenue or capital nature. You will keep your past as zero. It means, you will not estimate $ 80,000 as your expenditure because pervious year estimated expenditure is $ 85000. With this, you will spend $ 20,000 in useless projects. So, left nothing out of $ 1,00,000 and estimate total expenditures of $ 1,00,000. For example, if your revenue expenditures's estimation is $ 90,000. You can estimate the investment of $ 10,000 in SBI Mutual Fund (80% Debt Sources Projects). It can be only possible if you will work on zero based budgeting.
2nd Example :
Benefit of Zero Based Budgeting
Main benefit of ZBB is for Not-Profit organisation, Govt. sector and public sector. If there are more expenses for social welfare, they will not cut it. They will generate more financial resources by donation or tax or equity issue or new issue of currency.
Related : Cash Budgeting
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