Which type of budget starts from scratch each year without reference to previous expenditures?

A zero-based budget is a budgeting approach that requires all expenses to be justified for each new period, starting from a "zero base." This means that, unlike other budget types which may carry over previous years' budgets or adjust them based on incremental changes, a zero-based budget analyzes and constructs the budget from the ground up each year. Every function within the organization is reviewed, and all expenditures must be justified anew as if they were being proposed for the first time.

This method is particularly useful in ensuring that resources are allocated efficiently and effectively, as it compels managers to identify the necessity and justification for every line item in the budget, rather than merely basing the new budget on prior year’s expenses. This can lead to identifying areas where spending can be minimized and resources allocated to higher priority areas.

Other budget types, such as incremental budgeting, build upon previous budgets by adjusting them for inflation or expected changes. Bottom-up budgeting involves input from lower-level managers, allowing them to influence the financial planning based on their knowledge of operational needs. Top-down budgeting, on the other hand, starts with upper management setting overall budget limits and then passing those down to departments. None of these approaches require the same level of justification for every expenditure as zero-based budgeting