Zero-based budgeting emerged in the late 1960s as a response to incremental budgeting. With zero-based budgeting, all budgets start at zero, and activities/costs are only allowed if they are justified under investigation. All requests for resources must be presented and evaluated on the basis of cost-benefit. Zero-based budgeting is best suited to discretionary spending where there is no clearly defined input-output relationship such as in marketing, research and development, and training or public sector organization such as district councils.
The following are disadvantages of zero-based budgeting:
- It is an expensive and time-consuming process
- In a highly pressured environment, it may become overly competitive
- The necessary management skills to apply zero-based budgeting may be absent.
- The budgeting process may become too rigid and unable to react to unforeseen opportunities or threats.
- Managers may feel demotivated due to a large amount of time spent on the budgeting process.
- Zero-based budgeting can give rise to a short term focus to the detriment of long term goals.