Zero based budgeting is a method companies use to create an annual budget from scratch. This approach requires each department to justify its spending on a zero-based budget rather than relying on the previous year’s budget. This means that each department must justify all the expenses incurred during the year to ensure that each dollar spent is necessary and generates value.
Traditional | Zero based |
Focuses on incremental budgeting | Focuses on budgeting from a clean slate |
Uses historical data and prior year budgets to determine future budget | Uses data and analysis to determine the budget |
Orientation is towards making an adjusted budget | Orientation is towards re-evaluating the budget |
The budget goes through incremental changes to the existing budget | All activities are re-evaluated and budgeted |
Changes to the budget are subtle | The budget undergoes radical changes |
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