Zero-based budgeting is a method of budgeting in which all expenses for each new period must be justified. Under zero-based budgeting, no reference was made or considered of previous years. The budget request has to be evaluated thoroughly with its commencement from the zero-base.
- Evolution of zero-based budgeting (ZBB)
- Zero-based budgeting in India
- Features of zero-based budgeting
- Zero-based budgeting procedures
- Conditions for successful implementation of ZBB
- Need for zero-based budgeting
- Benefits of zero-based budgeting
- Limitations of zero-based budgeting
Evolution of zero-based budgeting (ZBB)
The Zero-based budgeting concept was advocated in 1924 by British budget authority Edward Hilton Young. He advocated complete justification of every item requested in a budget. The ZBB concept became more popular only in 1970s. In 1960s, ZBB was formally initiated in the Department of Agriculture of the USA. The ZBB as practiced today was developed at Texas Instruments Inc. during 1969 by Peter Pyhrr. The process was first adopted in Georgia. The result of ZBB in Georgia was mixed. In 1970s, Jimmy Carter was elected as American President amid recession. He vowed to recover the economy. He ordered for implementation of the ZBB in America. Soon it spread in to private organisations also. However the results are mixed. Later American President Ronald Regan dropped the ZBB concept.
Zero-based budgeting in India
In India, the principle of ZBB was initiated in the Department of Science and Technology in 1983. In 1986, the Indian government adopted ZBB as a technique for determining expenditure budget. The government made it mandatory for all ministries to review their programmes and activities and prepare their expenditure estimations based on ZBB concept. In seventh five-year plan, the ZBB system was promoted. However, later not much progress happened in this area.
Features of zero-based budgeting
ZBB works on the principle that every year, the projected expenditure for each project/programme must be start from zero. It means all budget requests should be considered freshly for every year with cost-benefit analysis.ZBB never uses the previous year’s amounts so as to eliminate the past mistakes.
Focus is on activities/programmes
The focus is on programs or activities instead of functional departments.
Best suited to discretionary costs
ZBB is best suited to discretionary costs, for example, advertising, research development and training costs.
A unit makes its budget request by preparing ‘decision packages’ for each activity it undertakes. Funding decisions are based on activity.
ZBB helps policy makers to achieve more cost-effective delivery of public services.
ZBB starts from the lowest level activity and then moves upwards.
It makes the functionaries accountable for the amount they are responsible for.
ZBB model was formulated to correct certain flaws of traditional budgeting system, which does notallow authorities to discover optional processes.
Zero-based budgeting procedures
According to Peter Pyhrr, the zero-based budgeting is an approach, not a fixed procedure or a set of forms to be applied uniformly across all organisations. The mechanics and management approach has differed significantly among the organisations that have adopted zero-base and the process must be adapted to fit the specific needs of each user.
Steps to the ZBB approach: Although the specifics differ among organisations, there are 4 steps to the ZBB approach that must be followed by each organisation:
- Identify ‘decision units’ (DU). Normally different departments are considered as decision units. The basic criterion should be that it is capable of carrying out different programmes or activities to achieve one objective.
- Analyse each decision unit in a ‘decision package’ concept. The content and format of the decision package must provide management with the information it needs to evaluate each decision unit. This information might include purpose/objective, costs and benefits, performance measures, optional means of achieving aims and benefits.
- Evaluate and rank all decision packages to develop the appropriations request. The ranking process provides management to allocate its limited resources by making management concentrate on these questions. ‘How much should we spend’ and ‘where should we spend it’? The decision packages should be evaluated and ranked as per their level of significance. Some subjectivity also needs to be used in this method with cost-benefit analysis as some activities may not be quantifiable.
- Prepare the detailed operating budgets reflecting those decision packages approved in the budget appropriation.
Conditions for successful implementation of ZBB
There are a few conditions for successful implementation of ZBB.
Committed Management: The top management should have a participatory role and they must be committed to implement the ZBB.
Fixed Goals: Goals to be achieved must be fixed. They should not be vague.Identification of Weak areas: Organisation must identify weak areas to be worked upon.
Trained Staff: ZBB requires a trained staff for its procedure to be implemented properly.
Review: Decision packages must be reviewed periodically.
Brainstorming Sessions: There must be brainstorming sessions at all hierarchical levels to get proper and timely feedback.
Need for zero-based budgeting
- Low priority programs can be eliminated or reduced.
- Effectiveness of programmes can be dramatically improved.
- Programmes of high priority can obtain increased funding by shifting resources within an agency.
- The government need not increase the tax revenue as ZBB can to do a more effective job with existing revenues.
Benefits of zero-based budgeting
Unbiased: The bias from previous information or datais eliminated.
Higher motivation: ZBB seeks employees to work more cohesively and closely together during the budget process. This results in high levels of motivation and interest among employees to do their work efficiently.
Effective Procedures: Zero-based budgeting will generate effective ways and methods to do the work.
New Ideas: Inzero-based budgeting new technologies, methods and materials are encouraged to make the organisation more successful.
Efficient Allocation of Resources: By following cost-benefit analysis ZBB will allocate the resources very efficiently.
Planning Tool: ZBB is a planning tool used in management which helps in identification of wasteful and redundant items of expenditure.
Limitations of zero-based budgeting
Bureaucratic and Time Consuming: TheZBBapproach takes a lot of time as it is a completely bottom-up approach.The process was so bureaucratic and time consuming that the organisations got discouraged to use it again. Incorrect Assumptions: The ZBB process can be useful only if the organisation has the time and knowledge to make accurate assumptions. Incorrect assumptions by not looking at the previous year’s assumptions will be of little help to the organisation.
Threat felt by Bureaucrats: Bureaucrats feel threat towards ZBB process as it evaluates the effectiveness of their programs.
Problems of Managers: The ZBB process require trained personnelfully aware of the concept, are difficult to find, who can carry out analysis of expenditure by applying the evaluative techniques like cost-benefit analysis, cost-effectiveness analysis etc.
Too Much Paper Work: It is a major factor contributing to the failure of ZBB.ZBB process require too much of paper work and it was found unmanageable by the organisations concerned.
Organisation Hierarchy: Like traditional budgeting, ZBB was also based on organisational hierarchy. Organisational hierarchy reinforces functional barriers and fails to focus on the opportunities for improving business processes.
Plan and Non-plan Expenditure in India: India follows a system of Plan and Non-Plan expenditure. They should be dealt differently, and it becomes quite difficult to rank them as one.
Though ZBB is a good technique of budgeting, it was not implemented successfully. ZBB does not fit into organisations with long range objectives. Proper attention, Commitment form management and trained personnel can better implement the ZBB process.