ZERO Based Budgeting

ZERO Based & Performance based . Budgeting

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PRESENTED BYVINEET AGGARWALSHIVANI HASIJAMUKUL DUDEJAVIKRAMMANISHHARISHMANOJ KOHLIYASH

PRESENTED BY

SHIVANI HASIJA

What is a Budget?A budget can be defined as a quantitative expression of the operational plans of an organisation for a future accounting period.Usually prepared for a period of one year but may be prepared to coincide with the seasonal needs or other factors as per requirement.It is both, a plan of action as well as control medium.The 3 essentials of a budget:Prepared in advance based on future plan of action.Relates to future period and based on objective to be achieved.Is a monetary statement that makes the management think, plan and act as a team to render better medical service at affordable costs.

Organisation Activities Resources (manpower, material, machinery) Money

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Importance of Budgeting:Why Should I Budget?

A Process of tracking your expensesA safety valve to prevent over expendituresFinancial control of inputsManagement of ongoing activitiesPlanning and setting prioritiesAccountability Ensures that the finances are spent for true purpose of spending. Controlling your financial affairs requires a budget. For many people, the word "budget" has a negative connotation. Instead of thinking of a budget as financial handcuffs, think of it as a means to achieve financial success.Whether you make thousands of dollars a year or hundreds of thousands of dollars a year, a budget is the first and most important step you can take towards putting your money to work for you instead of being controlled by it and forever falling short of your financial goals.

Importance of Budgeting:Why Should I Budget? (cont)

To those of you my Fellows..!! who think you know where your money goes without keeping detailed records, I issue this challenge: keep track of every cent you spend for one month. I promise you'll be surprised and perhaps shocked by how much some of your "small" expenditures add up to.

Budgeting and tracking your expenses gives you a strong sense of where your money goes and can help you reach your financial goals, whether they are saving for a down payment on a house, starting a college fund for your kids, buying a new car, planning for retirement, paying off the credit cards, or saving for that trip to Ayubia.

Types of Budgeting

The Traditional Line-Item BudgetIncremental Budgeting2. Zero Based Budgeting (ZBB)3. Performance based Budgeting (PBB)

1. Line-Item Budget

The traditional line-item budget, wherein legislators specify allowable spending on inputs (salaries, supplies, travel) was first developed to guard against the misuse of public funds.

Line Item Budgetingis arguably the simplest form of budgeting, this approach links the inputs of the system to the system. These budgets typically appear in the form of accounting documents that express minimal information regarding purpose within the system.

2. Incremental Budgeting Often used with line-item budget, assumes that funding for existing programs will continue at about the same level as in the past.

3. Zero Based Budgeting (ZBB) Zero-based budgeting, by contrast, assumes the previous years budget to be quite irrelevant and begins from scratch to identify and cost all of the inputs that will be required to achieve the desired level of activity.

Zero-based budgetingis a response to an incremental decision making process where the budget of a given fiscal year (FY) is largely decided upon by the existing budget of FY-1. In contrast toincrementalism, the allocation of scarce resourcesfundingis determined from a zero-sum accounting method.

4. Performance Based Budgeting (PBB)Performance budgeting aims to improve the effectiveness and efficiency of public expenditure, by linking the funding of public sector organizations to the results they deliver.

It uses systematic performance information (indicators, evaluations, program costings etc) to make this link. The impact of performance budgeting may be felt in improved prioritization of expenditure, and in improved service effectiveness and/or efficiency.

PRESENTED BY

VINEET AGGARWAL

Traditional Budget Revenue BudgetCapital BudgetIncome budgetExpenditure Budget

Hospital service charges i.e. Beds, OTs, OPD, Diagnostics, ConsultationsAuxiliary services i.e. Blood bank, Ambulance, Canteen, Telephone, Parking, Chemist, Laundry and linenMiscellaneous i.e. Rent, sale of scrapInvestments i.e. FDs, DividendsDonationsGrants Employee costManagementMedicalNursingPara medicalEngineering UnskilledAdmin and accountsMaterials & suppliesDietary servicesMaintenanceOther hosp expensesOffice expenses InterestDepreciation Investment in long term assets.Balance from revenue budgetLoans to finance capital projectsDisinvestment of assets

Presentation 1

ZERO BASED BUDGETING

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Traditional Budgeting Vs. Zero Base Budgeting Basic Difference Traditional Budgeting Zero Base BudgetingEmphasisIt is accounting oriented;emphasis on How MuchIt is more decision oriented; emphasis on WhyApproachIt is monitoring towards the expendituresIt is towards the achievement of objectivesFocusTo study the changes in the expendituresTo study the cost benefit analysisCommunicationIt operates only Vertical communicationIt operates in both directions horizontally and verticallyMethodIt is based on the extrapolation i.e. from the yester figures future projections are carried outIts decision package is totallybased on the cost benefit analysis.

Definition Zero Base Budgeting has been defined as a planning and budgeting process required by each manager to:

Establish objectives for his function.Define alternative ways of achieving the objectives.Selecting the best alternative so as to achieve these objectives.Break that alternatives into incremental levels of efforts.Costs and benefits of each incremental levels.Describe the consequences of disapproval.

Zero Base Budgeting is a method of budgeting in which all expenses must be justified for each new period. Zero base budgeting starts from a Zero-base and every function within an organization is analysed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.

ZBB is a technique which complements and links the existing planning, budgeting and review processes. It identifies alternative and efficient methods of utilizing limited resources in the effective attainment of selected benefits.

DefinitionThe 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

Historical Development - ZBBZero-base budgeting (ZBB) became popular in the 1970s but the concept has been around since as early as 1924 when British budget authority E. Hilton Young advocated complete justification of every item requested in a budget. Peter Pyhrr, who created and developed a ZBB system for Texas Instruments as part of his responsibilities as control administrator in 1962 is called "Father of ZBB technique. In 1962 the U.S. Department of Agriculture adopted a ground-up system of budgeting which is considered to be the first formal use of ZBB in the U.S. government.

The process finally evolved into the current ZBB concept, which was popularized by Pyhrr in 1970 in an article in the Harvard Business Review. Jimmy Carter, then Governor of Georgia, read his article, was impressed with it, and invited Pyhrr to join him in adapting ZBB for Georgia's 1972/1973 budget. Carter was so enthusiastic about the system that, when he became President, he ordered all federal agencies to implement a ZBB system by 1979.

The concept of ZBB soon spread throughout both the public and private sectors with mixed results and was the subject of many articles in the 1970s, although Ronald Reagan dropped ZBB during his tenure as President.Historical Development - ZBB

Historical Development - ZBB- IndiaIn India, ZBB was implemented in Science & Technology in the year 1983It was adopted by Govt India in 1986 as a technique for determining expenditure budgets. The Ministry of Finance made it mandatory for all the administrative ministries to review their respective programs and activities in order to prepare expenditure budget estimates based on the principles of zero-base budgeting.In 1986, Rajiv Gandhi eager to take India into the 21st century, wished to adopt zero-based budgeting (ZBB) & tried to implement ZBB in Defense Ministry also.ZBB was later emphasized in the Seventh Five year Plan(1988-93) Transportation sector.The Maharashtra government renamed and used it as development based budget.However not much progress in this regard has happened on this area since.

ZBB in IndiaWhile introducing ZBB, the Govt of India had issued a questionnaire to be filled for each programme some of which are:

Are there other agencies performing the same activity and if yes is it necessary to continue the same? Can we not eliminate?What changes would you suggest to make the activity/programme more affective and achieve the objective in a cost effective manner?If additional funds say 25% are given, what would be the benefit?If allotment of funds is cut say 25%, what would be the adverse consequences?

PRESENTED BY

HARISH

Steps involved in ZBBIdentification of decision units.Analysis of each decision unit through development of decision packages.Evaluation and ranking of decision packages to develop the budget.Preparing the budget including those decision packages which have been approved.

A ZBB decision unit is an activity/programme or department for which decision packages are to be developed and analysed. It can be described as a cost or a budget centre. Managers of each decision units are responsible for developing a description of each programme to be operated in the next fiscal year. For e.g. In a district, the decision units could be different specialist clinics, programme units, hospital OPD unit, dispensaries or individual PHCs. A specific manager should be clearly responsible for the operation of the program.Identify and describe a particular activity.It must have well defined & measurable objectives.It must have well defined & measurable impacts.Defining a decision unit

Development of Decision packagesAfter the identification of appropriate decision units, the next step is to prepare a document for each of these describing the objectives or purposes of the decision unit and the actions that could be taken to achieve them. Such document is called Decision Package.

Mutually exclusive Contains alternative ways of doing a job.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 - A specialist clinic can be a referral unit with only diagnostic facilities, the treatment and after care being done at district and PHC level. Equipment i.e. an X Ray unit may have just a vertical unit, or an additional horizontal unit, or a unit for bedside operation. Increased emergency beds and less normal beds.

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Decision Making - Review And Ranking Of Decision PackageDeciding to accept or reject or amend the activity.There is always a certain minimum level of effort in decision units which have to be necessarily performed (high priority units) funds to be committed.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.Surplus funds are then allocated to these decision packages.

Take a Decision Package:Is the activity under our control.Recognize less effective activities.Validate Arrangements(Elimination)Make the activity profitable

Decision Ranking ProcessFunction FunctionFunctionFunctionABCDA3A2A1B1B2C1C2C3C4D1D2D3A1B1C1C2D1D2A2A3B2D3C4Future BudgetMinimum NeedsOrder of priority

PRESENTED BY

MUKUL DUDEJA

Advantages Of Zero Base BudgetingOut 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.

Limitations of Zero Base BudgetingIncreased 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.

To Conclude

PRESENTED BY

VIKRAM

ZBB is clearly not for everyone. Here are the three major alternatives:

Priority budgeting. Under this system, the government first determines how much revenue it has available, then identifies the communitys most important priorities, and then allocates resources to the priorities rather than directly to departments. Programs are ranked according to how well they align with the priorities. This form of budgeting focuses on determining which services the government should offer in order to get the most value from the tax money. Hence, it too is a non incremental form of budgeting - an alternative to ZBB. What Are The Alternatives To ZBB?

Program review. Program review is a planning method used to examine, outside of the budget process, how a program is provided. It can answer several important questions, for example: What services should we be in the business of providing? For those services we do offer, what level of service should we provide? Are we providing that level of service efficiently? Program review answers these questions outside the pressures of the budget process, and thus may be more successful than ZBB in finding real alternatives.

Target-based budgeting (TBB). Unlike ZBB, TBB makes no attempt to re-examine base spending. Rather, each decision unit is given a target spending amount (for example, 90 percent of what was spent last year) and is asked to submit a budget for that amount. The total target for the organization is necessarily less than what is affordable. This is because the difference between the target and what is affordable is used to fund additional activities through decision packages. TBB is a significant improvement on incremental budgeting but is much less intensive than ZBB.

Preparation of detailed plan of actionTime required for each process Identifying likely problemsTotal time for completion of project

Financing and annual reviewing exercise

Work up of a time table

Programming

Budgeting

Scheduling

PRESENTATION 2 PERFORMANCE BASED . BUDGETING

PRESENTED BY

MANISH

PERFORMANCE BASED BUDGETING (PBB)Performance budgeting aims to improve the effectiveness and efficiency of public expenditure, by linking the funding of public sector organizations to the results they deliver.

It uses systematic performance information (indicators, evaluations, program costings etc) to make this link. The impact of performance budgeting may be felt in improved prioritization of expenditure, and in improved service effectiveness and/or efficiency.

Performance Based Budgetingattempts to solve decision making problems based on a programs ability to convert inputs to outputs and/or use inputs to affect certain outcomes.

Performance may be judged by a certain program's ability to meet certain objectives that contribute to a more abstract goal as calculated by that program's ability to use resources (or inputs) efficientlyby linking inputs to outputsand/or effectivelyby linking inputs to outcomes. A decision makingor allocation of scarce resourcesproblem is solved by determining which project maximizes efficiency and efficacy.

Performance budgets hold agencies accountable for what they achieve

Managing for Results (MFR)

Performance budgeting should be viewed in the broader context of a set of related managing forresults (MFR) reforms.

MFR can be defined as the use of formal performance information to improve public sector efficiency and effectiveness. Its fundamental starting point is maximum clarity about the outcomes which government is attempting to achieve, and about the relationship of outputs, activities and resources used to those desired outcomes.

Good strategic planning and business planning are an essential element of MFR.

The Basics of PBBObjectives.. Organizations should develop strategic plans of what they intend to accomplish. These plans should contain objectives based on outcomes that the public values.

Performance Measures Based on their strategic plans, organizations should develop specific, systematic measures of the outcome that can be used to determine how well organizations are meeting their objectives. E.g. mortality rates for health programs.

Linkage Objectives and performance measures are integral parts of budgetary process. Appropriations are linked to organizations results; how well they are meeting their objectives as indicated by performance measures.

Performance Information Fundamentals

Outcomes and outputs play a central role in all models of performance budgeting, and it is essential for any discussion of performance budgeting that these and related concepts are clearly understood.

Performance Concepts: the Results Chain

In the results chain framework, outputs are produced using inputs (resources) via activities and processes, and outputs generate outcomes for the community.

PRESENTED BY

YASH KUMAR

The Results Chain

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Outputs

Outputs are goods or services the products which a ministry or other government organization delivers to external parties.

This usually means services delivered to or for the direct benefit of the community. Examples of outputs include: medical treatments; advice received by farmers from agricultural extension officers; students taught; and police criminal investigations.

Most government outputs are services.

Outcomes

Outcomes are the intended impacts of outputs more precisely, the changes brought about by public programs upon individuals, social structures, or the physical environment. Health inspections of restaurants are an output, the intended outcome of which is that fewer diners fall sick. Criminal investigations are a police output, and reduced crime the outcome.

Many government services aim to achieve more than one outcome. For example, school education aims to increase the level of education of the population. But it also aims, amongst other things, to improve economic performance. Both a higher level of education and a stronger economy are outcomes. Because it is by means of the first of these that the second is achieved, a more educated population is said to be an intermediate outcome, and a stronger economy a higherlevel outcome.

The relation between proximate and highlevel outcomes is one of logical causality (i.e. the proximate outcomes induce the highlevel outcomes).

The way in which outputs are produced is conceptualized in the results chain in exactly the same way as the use of inputs in production activities and processes.

For example, the treatment which seriously injured person receives in hospital involves the use of a set of inputs (skilled staff, operating equipment and facilities, medical supplies, electricity etc) and a set of activities including anesthesia, surgery and nursing, as well as supporting activities such as supplies and facility management.

InputsInputs, as this example indicates, refer to all inputs, assets and capabilities which are or may be drawn on in the production process to deliver the outputs and outcomes desired.

Although inputs is the conventional results chain term, and therefore will be used here, the term resources actually captures better the scope of what is referred to.

Thus inputs which contribute to the capability to deliver results include not only equipment and buildings by, for example, organizational culture and staff morale.

PRESENTED BY

VINEET

ActivitiesThe term activities may seem selfexplanatory, but confusion between activities and outputs is very common. Some examples can help avoid this confusion:

In a hospital, anesthesia and cleaning are activities rather than outputs because they are components of the overall service provided to the patient, rather than the complete service.

The patient cant recover through anesthesia or cleaning in isolation, and it is only via the combination of all the necessary activities that the complete service (the output) is delivered.

Performance Measures and the Budget

There are two basic types of performance information: performance measures and evaluation..

Performance Indicators

Performance indicators are quantitative measures which provide information on the effectiveness and efficiency of programs and organizations. An indicator is representative to the degree to which it succeeds in measuring the dimension of performance which it seeks to measure.Performance indicators should be selected according to the extent to which they are: Relevant Representative Costeffective Comparable

Objectives..Indicators..Targets

We also need to be careful not to confuse objectives, indicators and targets.

An objective is a statement of what one is trying to achieve for example reducing death from HIV/AIDS.

By contrast, a performance indicator is quantified (e.g. the percentage of the population which is HIV/AIDS positive, or the number of persons dying annually from HIV/AIDS).

A target goes one step further and sets a precise aim to be achieved by a specific date (e.g. reducing the percentage of HIV/AIDSpositive persons in the population by at least onethird by 2020).

PRESENTED BY

VIKRAM

Linking Funding to Outputs ChallengesIssues!!

The main focus in PB system is the creation of links between the quantity of output (i.e. volume of services provided) and the level of funding.

Heterogeneous Outputs:

For many outputs produced by government, there is a much stronger link between funding provided and outputs delivered (or deliverable) than is the case for outcomes.

However, quite a few government services are not standardized. They are, rather, heterogeneous outputs. This means that the level of service provided to different clients, or in different cases, is deliberately varied so as to address differences in client conditions or circumstances.

Police criminal investigations are a classic example the amount of effort put in per case, even for the same types of case (e.g. murder investigations) varies enormously depending on the circumstances of the case.

Even in school education, which is quite standardized for the great majority of students heterogeneity is present when additional teaching and care activity is devoted to children suffering an intellectual or physical disability.

This means that these forms of performance budgeting can only be applies selectively to the right types of services.

2. Contingency

There is one other type of service for which tight links between outputs and funding are problematic. This is contingent capacity outputs, (which are subject to chance) of which a fire department is a good example.

The fire department maintains capacity to provide at very short notice an output (firefighting) for which the demand is highly unpredictable. It would be unrealistic to seek to build a very close link between the number of fires attended by the fire service and the level of funding.

Fire services cannot therefore be funded on a peroutput basis, but must instead be funded in such a way as to deliver a certain level of capacity to fight fires.

3. Quality with QuantityThere is also the question of potentially linking funding to output quality.

In funding only for output quantity, one creates incentives for agencies to cut costs by reducing quality. Including a quality component in funding could, in principle, resolve this problem. In practice, however, this is not easy, given the limits to our capacity to measure quality and the consequently highly imperfect nature of most quality measures.

In general, the best hope for linking funding to output quality is through some element of performance bonus funding based on quality measures (similar to outcome bonuses) in other words, by adding on to a system in which the main funding is based on output quantity a small additional element of qualitybased funding.

PRESENTED BY

MUKUL DUDEJA

Evaluation and Performance Budgeting

Performance budgeting is often represented as being only about the use of performance indicators in the budget. This is wrong, because it overlooks the crucially important role of evaluation.

A Definition of Evaluation

The systematic and objective assessment of an ongoing or completed project, program or policy, its design, implementation and results. The aim is to determine the relevance and fulfillment of objectives, development efficiency, effectiveness, impact and sustainability. An evaluation should provide information that is credible and useful, enabling the incorporation of lessons learned into the decision making process of both recipients and donors.

Evaluation also refers to the process of determining the worth or significance of an activity, policy or program. An assessment, as systematic and objective as possible, of a planned, ongoing, or completed development intervention.

Keith McKay (2007), How to Build M&E Systems to Support Better Government (World Bank Independent Evaluation Group).

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Role of Evaluation in PBB

Identify components of programs which can potentially be cut: this means programs which are not costeffective and which cannot readily be made costeffective through policy design or management changes.Identify savings which can be made by improving the efficiency of service delivery.

Evaluating Program Effectiveness

The evaluation of program effectiveness has a particularly important role to play in those forms of performance budgeting which focus on the allocation of resources in the governmentwide budget, of which program budgeting is the most important form. As we have seen, this means in particular that:Decisions about expenditure prioritization where to allocate limited resources are informed by good information on program effectiveness,Decisions about funding for specific ministries and agencies and in particular decisions on their requests for additional resources are informed by reliable information on how effectively the ministry or agency has used funding it has received in past budget.Evaluation is crucial in this context because performance indicators are frequently insufficient in isolation to permit judgments on program or agency effectiveness.

PRESENTED BY

VINEET AGGARWAL

Pros and cons of PBBLimit vs. Target PBB works with targets and goals. It may set a goal to put computers in 100 hospitals, for instance, instead of setting a limit on how much money can be spent on computers. While this has its advantages, it also creates difficulties. For instance, how much money should be spent on computers? What types of computers are best suited for the hospitals in question? A budget with limits helps answer these questions. A budget with only targets can be too nebulous, leading to inaccurate forecasts and over-expenditure.

Measurement Issues Another problem with the target system that PBB uses is measurement. Even if an organized budget can be developed and the project is carried through to completion, defining completion can pose problems. Some goals can be vague e.g.-- improving technology in a district hospital. An organization may have conflicting views on when that goal has been reached, which makes it difficult to spot an end for the project and a turning point for the budget.

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Cost Analysis Because PBB is so vague, it does not present a clear cost framework for organizations to follow. In other words, PBB can create a lot of extra work for analysts. They have to focus on a target, but also perform separate cost analysis to set individual prices on the steps involved. This extra cost analysis is a drain on funds and adds confusion to the budget.

Flexibility Problems Flexibility is one of the primary advantages of PBB. But it also opens the door for broad changes that can make previous cost analyses and budgets obsolete. PBB places a great deal of strategic power in the hands of public leaders and programs, but these have a habit of changing. A new director may be appointed and switch the target to 500 computers in hospitals, which requires a complete reworking of the budget.