ZERO BASE BUDGETING

Syed Amin Tabish

Zero-Based Budgeting

• A technique of planning and decision-making which reverses the working process of traditional budgeting

• It is a budgeting and financial management strategy to help policy makers achieve more cost-effective delivery of public services

• The concept of zero-base budgeting has been utilized successfully by private corporations.

Zero Based Budgeting

• A technique that sets all budgets to nil at the beginning of the year or period and requires from the departments that they justify all of their expenditures, not just those exceeding the budget.

• Money is allocated to the departments based on merit and not based on the previous year budget plus or minus some percentage such as in many traditional budgeting systems.

•

Scope• To redirect effort and funds from lower priority

current programs to higher priority new programs• To improve efficiency and effectiveness• To reduce spending• Its aim is to achieve is an optimal allocation of

resources • Managers are asked to identify and justify their

areas of work in terms of decision packages prior to starting the work.

Scope

• ZBB forces prioritization of government programs and activities

• With the prospect of insufficient revenue to match the demand of spending, it is useful for government to have a ranking of programs and activities based on proven effectiveness, as well as suggested alternatives to expensive or ineffective programs

• Conceptually, ZBB is a systematic logical approach to allocating limited resources where they will do the most good.

Traditional Budget

• Traditionally, most government budgets have been constructed by adding to the current expenditure level such amounts as seem warranted by circumstances in most jurisdictions, expenditures for the coming year will exceed those of the current year. For this reason most attention is directed to the increments that have been added to this year’s expenditure to reach the proposed budget total

Applications

• ZBB can be applied usefully to budget heads such as repairs, maintenance or equipment costs.

• The traditional incremental approach often pays scant attention to these heads, perhaps at best looking at trends over 2 or 3 years, and very often simply taking “last year plus x%”. But it is often possible for service priorities to be proposed, discussed and established without reference to previous years.

• Successful use of ZBB relies upon the effective involvement of all executive managers

The Process of ZBBTwo basic steps:• The first step is to develop what is referred to as

“decision packages.” • The second is to rank the decision packages. • The decision package is a document that

identifies and explains the specific activity, its goals and objectives, measurement of performance, costs, benefits, and alternative courses of action

• Ranking of decision packages is then accomplished at each management level until a comprehensive agencywide ranking is obtained.

What is different about ZBB• With zero-based processing one can forget

about last year, pretend that the program is brand-new, and see if one can provide a detail of expenses for what one would need to fully accomplish the program

• This technique will help one to develop a complete picture of what the program actually needs to cost and not just what it has been costing

Advantages• Efficient allocation of resources, as it is based on

needs and benefits• Helps to find out cost effective ways to improve

operations• Increases staff motivation by providing greater

initiative and responsibility in decision-making• Increases communication and coordination within

the organization• Identifies and eliminates wastage and obsolete

operations• Identifies opportunities for outsourcing• Focuses on value for money

Disadvantages

• Adds to the time and effort involved in budgeting• Difficult to define decision units and

decision packages, as it is very time-consuming and exhaustive• Forced to justify every detail related

to expenditure• Necessary to train managers.

Milestones in the introduction & implementation of ZBB

A – Developing Decision Packages

• The “decision package”refers to an analysis of each discrete activity, according to cost and purpose• Consider the benefits of the

activity, alternative courses of action, how to measure performance

Developing Decision Package (contd)• This milestone can be broken down further:Stage 1 – Defining the Scope of ZBB Decide which parts of the

organization are to be assessed using ZBB Stage 2 – Identify the resources• This stage falls into 2 parts:• The identification of the schedule of input resources that will be

required in order to deliver the outputs The identification of the individuals who will take responsibility for assessing the various options.

Stage 3 – Objective matching stage• It is possible that objectives may be deliverable at different service

levels, and in these cases, the review should identify, as a minimum:

Basic level of service Current level of service Any step changes in service

B – Ranking the decision packages

• The decision packages should be evaluated and ranked in order of importance• Performance measurement tools

including cost/benefit analysis are clearly a very important component

C – Allocating resources

• The ranking list then results in a priority order for the allocation of resources• The most important activities are

funded, whether they are existing ones, or new• The final budget will be made up of

the decision packages that have been approved for funding.

INCREMENTAL BUDGETING

Incremental Budgeting• Uses a budget prepared using a previous

period’s budget or actual performance as a base, with incremental amounts added for the new budget period

• The allocation of resources is based upon allocations from the previous period

• It fails to take into account changing circumstances

• It leads to a “spend it or lose it” mentality.

Advantages

• The budget is stable and change is gradual• Managers can operate their departments

on a consistent basis• The system is relatively simple to operate

and easy to understand• Conflicts are avoided when departments

appear to be treated similarly• Co-ordination between budgets is easier to

achieve.

Disadvantages

• Assumes activities and methods of working will continue in the same way

• No incentive for developing new ideas• No incentive to reduce costs• Encourages spending up to the budget so that

the budget is maintained next year• The huge amount of work involved• May lead to micro management, offering less

time and energy for the things that really matter.