QuickBooks 2019 All-in-One For Dummies by Stephen L. Nelson

Author:Stephen L. Nelson
Language: eng
Format: epub
ISBN: 9781119523772
Publisher: Wiley
Published: 2019-02-27T00:00:00+00:00

Top-line budgeting, however, possesses a well-known weakness: It tends to perpetuate previous bad budgeting decisions. If someone long ago decided to spend $10,000 on an advertisement in some special industry magazine, for example, top-line budgeting may continue to budget that $10,000 annual expense even though it no longer makes sense or never made sense.

Zero-based budgeting

Zero-based budgeting is the opposite of top-line budgeting. A zero-based budget works from the bottom up. A zero-based budget starts with individual revenue, expense, asset, liability, and owner’s equity accounts. It examines a specific account — postage expense, for example — and then tries to apply common sense and logic in coming up with a good postage expense budget amount. The budgeter may guess, for example, that the firm will send out 1,000 letters during the year and that the average postage per letter will equal 50 cents. In this case, the zero-based budgeting approach determines that postage expense for the coming year probably will equal $500. The zero-based budgeter calculates this amount by taking 1,000 letters and multiplying this amount by 50 cents postage cost per letter.

The advantage of zero-based budgeting is that it tends to fix poorly figured, previously budgeted amounts. It doesn’t simply perpetuate bad budgeting decisions of the past. New budgeted amounts are based on the application of common sense and simple arithmetic; the combination of these two items often produces pretty good numbers. That’s really cool.

Another neat feature of zero-based budgeting is that it makes people who benefit from or use some budgeted amount responsible for that budgeted amount. If some manager spent $50,000 on travel expense last year, top-line budgeting states that she gets to spend $50,000 this year. Zero-line budgeting, by contrast, makes the manager prove through the application of common sense and simple arithmetic that $50,000 of travel expense is reasonable for this year.

Zero-based budgeting isn’t perfect, however; it possesses a weakness in that it’s easy for budgeters to forget numbers or make calculation errors. Previously, I used the example of a budgeter guessing that postage expense for the coming year will be $500. That estimate comes from a guess about the number of letters sent in a year (1,000) and an estimate of the average postage expense for each letter (50 cents). If either of those numbers is wrong, or if (heaven forbid) the budgeter incorrectly multiplies one number by the other, the postage expense budget number is wrong. If the budgeter is budgeting hundreds or even thousands of budgeted amounts, she’ll undoubtedly make a few errors in the process. And she probably won’t be able to fix or find those errors because of the volume of budgeted amounts.

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