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Zero-based budgeting: definition & important aspects for buyers
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Zero-based budgeting in a nutshell:
Zero-based budgeting is a budgeting method in which all expenditure must be planned and justified from scratch each year instead of being based on the previous year's figures. For purchasing, this enables a systematic review of all procurement expenditure and helps to identify hidden savings potential.
Example: A production company applies zero-based budgeting and completely reviews its annual maintenance contracts (€250,000), resulting in a cost reduction of 15% (€37,500) in the following year by reassessing the services actually required and retendering.
Contents
What is zero-based budgeting?
Zero-based budgeting is a method of budgeting in which every expenditure must be justified from scratch, regardless of previous budgets or historical data. Instead of updating existing budgets, the process starts from scratch ("zero-based") and justifies all costs on the basis of current targets and requirements. This approach encourages a critical examination of all expenditure and enables a more efficient allocation of resources.
Core elements of zero-based budgeting
Significance for modern purchasing
In procurement management, zero-based budgeting enables effective cost control and helps to optimize the purchasing strategy. Buyers are encouraged to critically question expenditure and analyze actual requirements. This leads to well-founded decisions, a better negotiating position with suppliers and supports the achievement of cost-saving targets.
Zero-based budgeting: from incremental budgeting to zero-based budgeting
Zero-based budgeting revolutionizes the budgeting processby justifying every cost item from the ground up instead of building on historical data. While traditional methods often perpetuate inefficient spending structures, zero-based budgeting enables a complete realignment of financial resources towards strategic goals. The need for this transformation stems from increasing competitive pressures and the need for greater cost analysis in organizations.
Old: Incremental budgeting
Traditional approach: With incremental budgeting, companies use the previous year's budget as a starting point and adjust it by a certain percentage. In practice, this means that departments simply increase or decrease their existing budgets slightly without critically scrutinizing each item. This method is simple and time-saving, but often leads to inflated costs and a lack of transparency. It also perpetuates inefficient processes and outdated expenditure items, which can compromise risk analysis.
New: Zero-based budgeting
Zero-based budgeting: With the introduction of zero-based budgeting, the budgeting process starts at zero and every expenditure must be fully justified. Modern implementation uses digital tools and demand analysesto create precise demand forecasts. Companies analyze each cost item in terms of its contribution to business goals and prioritize resources accordingly. This method leads to a significant reduction in unnecessary expenditure, increases financial flexibility and strengthens strategic alignment. It also promotes a culture of cost discipline and efficiency throughout the organization.
Practical example: Introduction of zero-based budgeting at XYZ AG
XYZ AG, a leading mechanical engineering company, implemented zero-based budgeting to optimize its cost structure. By analyzing all expenditure items in detail, the company was able to identify and eliminate non-value-adding costs of 5 million euros. Investments were realigned, enabling a 20% increase in research and development budgets. As a result, the profit margin improved by 7% within a year, while product innovation was accelerated. The implementation led to sustainable cost savings and strengthened XYZ AG's competitive position on the global market.
Conclusion on zero-based budgeting
Zero-based budgeting is an effective tool for basic cost control and resource optimization in purchasing. Despite the high level of effort involved, its systematic approach enables considerable savings potential and a strategic alignment of expenditure with the company's objectives. With increasing digitalization and AI support, the method is becoming even more efficient and sustainable. Zero-based budgeting is a valuable approach for companies that want to optimize their cost structures in the long term.
