ZERO BUDGETING

Mercy Jennifer. J, II year, M.Sc Nursing.

WHAT IS ZBB?
Zero Base Budgeting (ZBB) is a control technique which an organization requires while preparing its budget, should not take earlier year's expenditure for granted but should start afresh.

MEANING
It is a system or a management process whereby each governmental programme, regardless of whether it is new or existing programme must be justified in its entirety each time a new budget is formulated.

DEFINITION
"Zero Base Budgeting is a technique which complements and links the existing planning, budgeting and review process. It identifies alternative and efficient methods of utilizing limited resources in the effective attainment of selected Financial Administration benefits. It is a flexible management approach which provides a credible rationale for reallocating resources by focusing on the systematic review and justification of the funding and performance levels of current programmes or activities. Peter Sarant

OBJECTIVES
Involve managers at all levels in the budget process. Justify the resource requirements for existing activities as well as the new activities. Focus the justification of the evaluation of discrete programmes or activities of each decision unit. Establishes for all managerial levels in an agency objectives against which accomplishments can be identified and measured.

OBJECTIVES
Assess alternative methods accomplishing the objectives. of

Analyze the probable effects of different budget amounts or performance levels on the achievement of objectives To provide a credible rationale for re-allocating resources

AIMS
Zero Base Budgeting aims at achieving a state of affairs whereby the whole of the budget needs to be justified in order to combat waste and complacency ensure that the relative tasks and activities remain under constant watch review alternative levels of action in each sector periodically.

CONCEPT OF ZBB
Since the first budget of any organization is always prepared from zero, all the organizations experience this approach at least once. In zero base budgeting the idea is proposed to experience it year after year i.e. every time the budget for the next period is prepared. This does not mean that efforts made earlier are not taken into consideration at all.

CONCEPT OF ZBB
What it exactly means is that one must re-evaluate all activities to find out the level to which such activity should be funded; i.e. whether it should be eliminated or shall be funded at reduced level or increased level or similar level? It shall be determined by the priorities established by top management and by the availability of funds.

COMPARISON OF TRADITIONAL AND ZERO BUDGETING

ZERO BASED BUDGETING Zero Base Budgeting is a decision-oriented approach It focuses on old and new activities and connects short and long range goals by monitoring the achievements of objectives. TRADIATIONAL BUDGETING

Traditional budgeting is accounting-oriented. It focuses on increments and monitors expenditures.

NEED FOR ZBB

A genuine need within the organization.

Assessing the management environment

A competent management accountant Qualified support and involvement of top management.

 ZBB must be tailored to the technical requirements of the organization intending to implement it. A budget should be prepared for the organization. The implementation of ZBB programme will be aided by a commitment to post implementation review and maintenance of the programmes.

FOUR STEPS OF ZBB

IDENTIFICATION OF DECISION UNITS

ALLOCATION OF RESOURCES

FORMULATING & DEVELOPING DECISION PACKAGES

INCLUSIONS OF DECISION PACKAGES

DECISION UNITS
Distinct segment of an organization for which budget is prepared. Lowest units in the organizational hierarchy, headed by responsible managers having authority to make decisions on the activities under their control. Capable of carrying out different programmes or activities to achieve an objective.

Analysis of decision units are based on The functions of the department Whether any of the tasks are being performed due to some abnormal situations such as expansion, consolidation Whether any of the tasks being performed be reduced or eliminated completely The minimum staffing required to accomplish the normal functions of the decision units.

FORMULATING & DEVELOPING DECISION PACKAGES

Pyhrr defines it "the decision package is a document that identifies and describes a specific activity in such a manner that management can (a) evaluate it and rank it against other activities competing for the same or similar limited resources and (b) decide whether to approve or disapprove it.

INCLUSIONS OF DECISION PACKAGES

A description of the functions or activities of the decision unit. The goals and objectives of the various functions/activities of the unit. Benefits to be derived from financing the activity/ project. Relevance of the activity/project to the overall objectives of the organization/department in the present context. The consequences of its non-funding. The projected/estimated cost. The yearly phasing of the proposed expenditure. Alternative ways of performing the same activity or same objective

RANKING THE DECISION UNITS

Ranking is the process of arranging the various service levels (decision packages) and benefits to be gained from the additional funds to be allocated.

These are ranked in order of priority or decreasing benefits to the organisation.

The process allows management to allocate scarce resources by concentrating on the following three key questions: Where to spend the money first? How much should be spent in pursuing these goals and objettives? What are the consequences of non-implementing those decision packages which are not going to be approved?

ALLOCATION OF RESOURCES
The ZBB can be adopted by any organization willing to aggressively eliminate its budgetary deficit. Only managers intimately acquainted with the organization culture can make it work effectively. Although the process is ideally suited for cost effective planned growth, most managers probably will be initially interested in its enduring costreduction aspects and the capability it provides for responding flexibility, to sudden shifts in an operating environment.

INTRODUCTION OF ZBB IN INDIA

ADVANTAGES OF ZBB
Efficient allocation of resources, as it is based on needs and benefits. Drives managers to find cost effective ways to improve operations. Detects inflated budgets. Useful for service departments where the output is difficult to identify. Increases staff motivation by providing greater initiative and responsibility in decision-making.

 Increases communication and coordination within the organization. Identifies and eliminates wasteful and obsolete operations. Identifies opportunities for outsourcing. Forces cost centers to identify their mission and their relationship to overall goals. Helps in identifying areas of wasteful expenditure Used for suggesting alternative courses of action.

DISADVANTAGES OF ZBB
Difficult to define decision units and decision packages, as it is time-consuming and exhaustive. Forced to justify every detail related to expenditure. Necessary to train managers. Difficult to administer and communicate the budgeting because more managers are involved in the process.

 In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.