Differences Between Traditional and Zero-Based Budgeting
Traditional budgeting is a very simple method and it is computed on the basis of historical data and it can be used for all the departments of an organization whereas zero based budgeting is a complicated method which is computed on the basis of estimated data and this can be only be used in the case of profit center.
The most important difference between traditional and zero-based budgeting is that in traditional budgeting the costs aren’t minimal since the previous year’s expenditure is taken into consideration; however, in zero-based budgeting, the costs can really be minimal as the starting point is considered to be zero.
Companies budget the costs/expenses to make sense of what may happen in the future. Setting a budget ensures that the businesses are allocating their capital right and are allowing the costs to be minimal.
One of the most common budgeting methods is traditional budgeting. As per traditional budgeting, a company sets forth its forecast of expenses on the basis of the previous year’s expenditure.
On the other hand, zero-based budgeting which happens to be a popular budgeting method assumes nothing; rather they base their assumptions on budgeting as zero.
Traditional Budgeting vs Zero Based Budgeting Infographics
Key Differences Between Traditional and Zero-Based Budgeting
- Traditional budgeting needs a reference point; zero-based budgeting on the other hand always starts from zero.
- Traditional budgeting takes the preceding year’s expenses as base data points; zero-based budgeting takes the strategic approach to assign budgets to each unit/department.
- Traditional budgeting is simplistic since it is done regularly with a similar approach; zero-based budgeting is quite complex since it encourages re-evaluation every time it is used.
- Traditional budgeting is basically based on historic information, that’s it revolves around accounting. Zero-based budgeting is based on estimated information and that’s why it revolves around decision making.
- Traditional budgeting encourages similar costing of the previous year. Zero-based budgeting encourages cost-effectiveness.
|Basis for Comparison||Traditional budgeting||Zero-based budgeting|
|1. Meaning||It’s calculated by keeping the previous year’s budget as a base.||It’s calculated by keeping the starting point as zero.|
|2. Preparation||Quite simply.||Very complex.|
|3. Emphasis||Expenditure for the previous year.||Each item is considered as per the new economic appraisal.|
|4. Approach||Based on historical information.||Based on estimated information.|
|5. Cost-effective?||It doesn’t encourage cost-effectiveness.||The purpose is ensuring cost-effectiveness.|
|6. Prefers||All departments.||Only profit centers.|
|7. Effectiveness||Effectiveness depends on the individuals who did the previous year’s budgeting.||Effectiveness depends on the current top management of the company.|
|8. Linked to||Assumptions of the previous year.||Estimation of which department can bring more profits.|
|9. Clarity||Almost none.||High.|
|10. Orientation||Orientation revolves around accounting.||Orientation sits around project/decision unit.|
Traditional budgeting is truly out-dated. And other than becoming a simplistic process it doesn’t serve the company, a business or even an individual.
Not only traditional budgeting is simplistic, but it’s also very time consuming because it involves a lot of spread-sheets. And chances of errors are also more in using this method. On the other hand, zero-based budgeting ensures cost-effectiveness and detailed-orientation which help a business generate more profits and an individual save and invest more money.
Without a tinge of doubt, zero-based budgeting is a far superior approach than traditional budgeting.
This has been a guide to Traditional Budgeting vs Zero Based Budgeting. Here we discuss the key differences between traditional budgeting and zero-based budgeting along with the infographics and comparative table. You may also have a look at the following articles –