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Zero Based Budgeting
1.
2. Contents
Definition
Historical development
Steps Involved
1. Decision Units
2. Decision Package
3. Decision Making
Advantage
Limitations
Conclusion
3. Definition of Zero-Base Budgeting
The Objective of Zero Based Budgeting is to “reset the clock” each year.
The Traditional incremental budgeting assumes that there is a guaranteed
budgetary base-the previous year’.
Zero Based Budgeting implies that managers need to build a budget from the
ground up, starting at zero.
Resources are not necessarily allocated in accordance with previous patterns
and consequently each existing item of expenditure has to be annually re-
justified.
Purpose - ZBB is to reevaluate and reexamine all programs and expenditures
for each budgeting cycle by analyzing workload and efficiency measures to
determine priorities or alternative levels of funding for each program or
expenditure.
Through this system, each program is justified in its entirety each time a new
budget is developed
4. Historical development of Zero
Base budgeting
ZBB is used in the private and public sectors for decades.
Jimmy Carter’s use of it in Georgia in the early 1970s.
In the private sector, the major leap forward occurred with the development at
Texas Instruments Inc. of a way to handle the mass of data. This involved the
implementation of a “Decision Package” approach to prepare the 1970 budget
for the Staff & Research Divisions.
5. Steps involved in zero base
budgeting
1. Identification of decision units
2. Development of Decision packages
3. Review and ranking of decision making
6. Identification of decision units
A specific manager should be clearly responsible for the operation of
the program.
It must have well defined & measurable impacts.
It must have well defined & measurable objectives.
Identify and describe a particular activity.
After the identification of appropriate decision units, the next step is to
prepare for each of these a document describes the objectives or
purposes of the decision unit and the actions that could be taken to
achieve them. Such document is called “Decision Package”.
7. Development of Decision packages
1. Mutually exclusive – Contains alternative ways of doing a job.
2. Incremental – Defining different levels of efforts
Decision packages will have work packages
Costs, returns, purpose, expected results, Alternatives available,
Consequences if activity is not performed or reduced.
Example - Opening a Hospital
Staff(Doctors, Nurses…)
Equipments and increased staff
Emergency beds and less normal beds
Increasing beds and other facilities
8. Decision Making - Review and
Ranking of decision Package
Deciding to accept or reject or amend the activity.
Once the decision packages have been prepared, they are ranked on an
ordinal scale i.e 1st, 2nd, 3rd, etc in order of priority using Cost benefit
Analysis.
Take a Decision Package:
1. Is the activity under our control.
2. Recognizing less effective activities.
3. Validate – Arrangements(Elimination)
4. Make the activity profitable
9. Advantages of zero base budgeting
Out of date inefficient operations are identified.
Allow managers to quickly respond to changes in external environment.
It Promotes questioning and challenging attitudes.
It ensures efficient use of limited resources by allocating them according to the
relative importance of the programs.
The annual review of the programs indicates the relative worth of the programs
and thus ensures no programs continues beyond its productive life.
It helps the management to design and develop cost-effective techniques for
improving operations.
The corporate objectives can be achieved more successfully under zero-base
budgeting.
The establishment of decision units makes the performance evaluation system
more effective.
10. Limitations of Zero Base Budgeting
Increased paper work.
Cost of preparing many packages.
Subjective ranking.
More emphasis on short term benefits and Qualitative benefits are ignored.
Small organization cannot afford it.
The identification of decision units and decision packages creates number of
problems for the organization(Decentralized).
The process of zero base budgeting requires experiences, intelligence,
expertise, and continuous training on the part of executives. Thus , it is not
suitable for an ordinary organization.
11. Conclusion
Allow managers to quickly respond to changes in external
environment.
It promotes questioning and challenging attitudes.
It ensures efficient use of limited resources by allocating them
according to the relative importance of the programs.
Cost effective decision making and your CFO will love it..
