Impact of Budget 2020 on NBFCs
Non-Banking Financial Companies or NBFC plays a vital role in India’s financial system. Howev...
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All types of businesses prepare a budget for adequate allocation of funds and effectively manage the cost of expenses. Due to the Covid-19 pandemic, businesses have suffered a significant loss and are looking for solutions to mitigate the losses. While presenting Budget 2021-2022, the finance minister mentioned the role of zero-based budgeting (particularly zero budget farming) and more resilient budgeting models to avoid unnecessary expenditure and restart the growth cycle and profitability.
Zero Based Budgeting entails the preparation of a budget without any past references. The zero-Based Budget process is different from a traditional budgeting system (incremental budgeting system) in the way that the former budget is constructed fresh for each budget period starting from the base zero. In contrast, traditional budgets are based on the forecasts and allocated funding of the previous year’s budget template.
In zero-based budgeting, the existing business activities are critically analysed and examined along with newly proposed activities and justify each line item before allocating the fundsin the budget. Hence, this budget understands the actual needs of the business and disallows unnecessary credits for fancy endeavours.
The features of Zero based budget are discussed below:
Zero-based budgeting can be prepared using different methods and unique approaches; some of the steps involved in creating zero based budget are discussed.
The foremost step for zero based budgeting is to identify the goals and objectives of the company.A new annual budget and structured operating plan are prepared from scratch without using the previous year’s actuals as a baseline.
A systematic study of all the budget components has to be called to determine the scope for saving and cutting unnecessary expenses. Under the evaluation, a priority is given to comprehensive packages of items and ranked as per the needs of the business. Special emphasis is given to the cost-effective and cost-saving areas in zero based budgeting.
A company introducing the zero-based budget approach has to curb the multiple bottlenecks present in the organisation and look for alternate and efficient methods for achieving the current targets.
Some business activities need regular cost reduction and have to be separated and prioritised.A framework shall be put in place for performing all the determined activities in time bound manner to realise the maximum outcome. Adopting artificial intelligence, automation, and standardised practice can be beneficial for managing finances in difficult times.
After the comprehensive planning and execution processes, the effective communication of specific roles and responsibilities to the employees and different business units of an organisation is required to complete the zero-based budgeting process.
In recent years, large MNCs and private equity companies have started adopting zero-based budgeting as it generates space for cost minimisation and financial stability. The concept requires the training of employees to build cost-cutting culture.To summarise, zero based budgeting allows an efficient resource allocation with a cost reduction mechanism.
Read our Article: An overview of the 2022 Budget