Being the type of budget that I prefer, due to the fact that it is the only one that allows budgeting based on a dream, which in the holistic point of view should be the basis for any business!

However, in order for a budget to be useful and successful for the company, it is essential that it answers questions such as:

- What investments do you need to make the dream come true?

- Does the company have capital for the investment?

- Will these, possible investments, have a return?

- Is it necessary to invest in human resources and thus increase the staff?

- In the various possible scenarios, optimistic and pessimistic, will the cash flow be positive?

- Will the projected results be satisfactory?

Whatever type of budget is chosen by the company and its financial managers, all the previous questions have to be answered in the same document.

We have already explored, in previous articles the concept of corporate budgeting, types of budgets, among others. Today we will put our focus, on a specific type of budget: zero-based budgeting. Have you heard of this method?

Zero-Basis Budgeting: Concept

This is a type of business budget, well known among managers, because it is a type of budgeting and planning that analyzes expenses from a zero base, thus reducing costs and expenses that are considered unnecessary or superfluous.

This methodology requires a detailed evaluation of expenditures, starting from a zero base (not necessarily unknown). This is the big difference between the OBZ and a traditional budget, because the latter just replicates the values of a given year for the next, assuming that in the previous year there was no room for unnecessary or superfluous expenses.

So what can a zero-based budget (OBZ) do for a company?

This type of planning allows an improvement of the company's results and performance, and how? Through a reduction of costs, expenses and expenditures, considered unnecessary and also allows an involvement of all department managers in the preparation and the whole budget process.

 OBZ- Logic Inversion

This methodology was born and applied for the first time in the United States of America, in the 1970s, and generated very positive results in several companies, where it was implemented, revolutionizing what was traditionally done.

OBZ effectively reversed the logic of things and managers began to see this method as very effective and inclusive, since it required the inclusion of all departmental managers, in order to arrive at more realistic values and in accordance with the knowledge of each one in his sector. This method forces to budget by capacity and need and not by historical or habit effect.

So why is this method no longer used?

This method, although revolutionary in its scope, has major obstacles in its application related to the complexity and time required for its execution.

Once again, there are no perfect methods suitable for all companies, and its use should be considered together with other methods depending on the moment the company is going through. I strongly recommend the use of this method for project and investment planning since using historical elements for this case doesn't make much sense.

What do you think of this method? Have you used it?