Zero-based budgeting (ZBB) and incremental budgeting are two distinct approaches to budgeting, differing in their underlying principles and methodologies. Here’s a comparison highlighting the key differences between the two:
- Budgeting Approach:
- Incremental Budgeting: Incremental budgeting starts with the previous period’s budget as a baseline and makes incremental adjustments for changes or additional requirements.
- Zero-based Budgeting: Zero-based budgeting requires justifying all budgeted amounts from scratch, regardless of the previous period’s budget. Each expense item or activity is evaluated based on its merits, and budgets are built from zero.
- Resource Allocation:
- Incremental Budgeting: Resource allocation in incremental budgeting primarily focuses on maintaining the existing allocation with incremental adjustments. It assumes ongoing activities and resource requirements will remain consistent unless there are significant changes.
- Zero-based Budgeting: Zero-based budgeting encourages a thorough review and reallocation of resources based on the justification of each expenditure. It challenges the status quo and allows for greater flexibility in resource allocation.
- Level of Scrutiny:
- Incremental Budgeting: Incremental budgeting often involves a limited examination or scrutiny of existing spending patterns. It assumes that the current allocation of resources is appropriate unless there is a compelling reason to make significant changes.
- Zero-based Budgeting: Zero-based budgeting requires a comprehensive review of all expenditures, regardless of their historical or previous approval status. Each expense item is evaluated based on its necessity, efficiency, and alignment with organizational goals.
- Focus on Cost Reduction:
- Incremental Budgeting: Incremental budgeting does not inherently focus on cost reduction, as it primarily maintains existing spending levels and only makes incremental adjustments based on changes in circumstances.
- Zero-based Budgeting: Zero-based budgeting emphasizes cost reduction and efficiency improvements by requiring a thorough justification of each expenditure. It encourages finding cost-effective alternatives and eliminating unnecessary expenses.
- Planning Horizon:
- Incremental Budgeting: Incremental budgeting often maintains a shorter planning horizon, as it builds upon the previous period’s budget and focuses on incremental adjustments for the current period.
- Zero-based Budgeting: Zero-based budgeting may involve a more extensive planning horizon, as it requires a comprehensive evaluation of all budgeted items from scratch, considering both short-term and long-term priorities.
- Flexibility and Adaptability:
- Incremental Budgeting: Incremental budgeting offers stability and predictability, as it maintains continuity with the past and minimizes disruption caused by frequent budget revisions or significant departures from the previous budget.
- Zero-based Budgeting: Zero-based budgeting offers greater flexibility and adaptability, as it challenges assumptions and encourages a fresh look at resource allocation. It allows for adjustments based on changing priorities and evolving business needs.
Both incremental budgeting and zero-based budgeting have their own advantages and considerations. The choice between the two depends on the organization’s specific circumstances, goals, and desired level of scrutiny, flexibility, and cost control. Some organizations may adopt a hybrid approach, combining elements of both methods to achieve the desired balance between stability and thorough evaluation.