A budgeting strategy known as zero-based budgeting (ZBB) starts each budgeting period from scratch rather than using prior budgets as a guide. It requires you to justify every expense and allocate resources based on needs and priorities. Here's a simplified explanation with examples:
1. Traditional Budgeting: In traditional budgeting, you typically use the previous year's budget as a starting point and make adjustments. For example, if you allocated $10,000 for marketing last year, you might increase it by a certain percentage for the new budget.
2. Zero-Based Budgeting: With zero-based budgeting, you assume you have zero dollars available to spend and build your budget from the ground up. You evaluate each expense and justify why it should be included in the budget.
Example 1: Let's say you're a small business owner implementing zero-based budgeting. You would start by listing all your expenses, such as rent, salaries, marketing, supplies, etc. For each expense, you would assess its importance and necessity. If you find that a particular expense doesn't directly contribute to your business goals, you might choose to eliminate or reduce it.
Example 2: As an individual using zero-based budgeting, you would examine all your monthly expenses and prioritize them based on your needs and financial goals. You would evaluate recurring expenses like rent, utilities, groceries, transportation, entertainment, etc. If you find that spending on excessive entertainment is hindering your ability to save or pay off debts, you could decide to allocate more funds towards savings and reduce entertainment expenses.
The key idea behind zero-based budgeting is to question every expense and ensure that resources are allocated where they provide the most value. It encourages a more intentional and efficient use of funds.
Remember, zero-based budgeting can be adapted to different contexts, whether personal finance, business budgeting, or even government budgeting.