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Zero based budgeting and rollover budgeting

Zero-based budgeting is an approach to planning and decision-making which reverses the working process of traditional budgeting. In traditional incremental budgeting, departmental managers justify only variances versus past years, based on the assumption that the "baseline" is automatically approved. By contrast, in zero-based budgeting, every line item of the budget must be approved, rather than only changes.[1] During the review process, no reference is made to the previous level of expenditure. Zero-based budgeting requires the budget request be re-evaluated thoroughly, starting from the zero-base. This process is independent of whether the total budget or specific line items are increasing or decreasing.

The term "zero-based budgeting" is sometimes used in personal finance to describe "zero-sum budgeting", the practice of budgeting every dollar of income received, and then adjusting some part of the budget downward for every other part that needs to be adjusted upward.

Zero based budgeting also refers to the identification of a task or tasks and then funding resources to complete the task independent of current resourcing.

Advantages

Efficient allocation of resources, as it is based on needs and benefits rather than history.

Drives managers to find cost effective ways to improve operations.

Detects inflated budgets.

Increases staff motivation by providing greater initiative and responsibility in decision-making.

Increases communication and coordination within the organization.

Identifies and eliminates wasteful and obsolete operations.

Identifies opportunities for outsourcing.

Forces cost centers to identify their mission and their relationship to overall goals.

Helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action.

Disadvantages

More time-consuming than incremental budgeting.

Justifying every line item can be problematic for departments with intangible outputs.

Requires specific training, due to increased complexity vs. incremental budgeting.

In a large organization, the amount of information backing up the budgeting process may be overwhelming.

its implement on big scale not on small scale industries

A rollover budget is a budget in which the funds, if not spent in a particular month, roll over into that budget for the following month, adding to the allocation for that particular month.

Benefits

A rollover budget offers many advantages. It prevents you from going into debt because the budget amounts represent what you have really spent. It is easy to spot areas where you have problems spending money, because the category will constantly be in the negative. It also makes it easy to divide your annual expenses and save for them each month. You can have a category for property taxes, and contribute to it each month, and you will be able to pay your taxes when the time comes.

Disadvantages

One disadvantage of rollover budget is that it can be difficult to recover from a bad month. If you overspent for some reason, it can be difficult the next month to come out even because the money is already missing from your budget, and you may continuously roll over negative budget amounts. Another disadvantage is that you may be spending money from the categories with extra money in it without realizing it to cover your negative balances.



 


Date: 2016-03-03; view: 282


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