Differences Between Traditional and Zero-Based Budgeting

The most crucial difference between traditional and zero-based budgetingZero-based BudgetingZero-based budgeting refers to the budgeting method whereby the expenses and income on the list start from zero. There is no reference point for the budget items, and each of these expenses is individually interpreted as per requirement.read more is that the costs aren’t minimal in traditional budgeting since we consider the previous year’s expenditure. However, in zero-based budgeting, the costs can be minimal as we consider the starting point 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 budgetingTraditional BudgetingTraditional budgeting is one of the ways for preparing a company’s budget for a specific time period in which the previous year’s budget is used as the base for preparing the current year’s budget.read more. As per traditional budgeting, a company sets forth its forecast of expenses based on the previous year’s expenditure.

On the other hand, zero-based budgeting, which happens to be a popular budgeting method, assumes nothing; instead, they base their assumptions on budgeting as zero.

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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 assigning budgets to each unit/department.Traditional budgeting is simplistic since it is done regularly with a similar approach; zero-based budgeting is quite complicated since it encourages re-evaluation during usage.Traditional budgeting is based on historical information, which revolves around accounting. Zero-based budgeting is based on estimated data, and that’s why it revolves around decision-making.Traditional budgeting encourages similar costing to the previous year. Zero-based budgeting supports cost-effectiveness.

Comparative Table

Conclusion

Traditional budgeting is truly outdated. And other than becoming a simplistic process, it doesn’t serve the company, a business, or even an individual.

Not only is traditional budgeting simplistic, but it’s also very time-consuming because it involves a lot of spreadsheets. And chances of errors are even 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 to traditional budgeting.

This article has been a guide to Traditional Budgeting vs. Zero Based Budgeting. Here we discuss the critical 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 –

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