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³ A B UD GE T I S J US T A M ET HO D O F W OR R Y I NG B E FOR E Y O U S PE ND MONE Y ,

 AS WELL AS A FTERWA RD.´

- A N O N Y M O U S

ZERO BASED BUDGETING

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Historical Background

y Introduced by Peter A. Pyher in the y ear 1970 in 

Texas Instrument, USA , defines ZBB as, ³Budgeting all the activities of  the organization from scratch or zero, disregarding trends or historical levels of  expenditure.´

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Concept

y  A financial management technique for planning and controlling expenditures.

y Image of  the w ord µZERO¶.

y Identif  y ing the effected areas of  econom y.

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Definition

y ³A n operating, planning and budgeting process,  which requires each manager to justif  y his entire 

 budget requisition detail from scratch(hence zero  base). Each manager states why he should spend an y 

mone y at all. This approach requires that all activities be identified as decision packages, which

 w ill be evaluated by s y stematic anal y sis and ranked in order of  importance.´

-By Peter A. Pyher

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THE ZBB PROCESS

Identification of Decision Units

 A nal y sis of Decision Units

Formulation of Decision Packages

 A llocation of Organizational R esources

Preparation of Detailed Budget

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Process Details

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 A dvantages

y Operational Efficienc y.

y Helps in finding out-of -date and inefficient operations.

y  A pt for staff  and support areas.

y Focus on A nal y sis and Decision Making.

y Optimum A llocation of Scarce R esources.

y

Ps y chological Impact.y Increase in involvement of  lo w er and middle level personnel in the budgetar y s y stem.

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Disadvantages

Functional Orientation A ttitude of ZBB.

Formulation and R anking of Decision Packages.

Time and Cost.

Sometimes emplo y ees are not co-operative.

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Zero Based BudgetingZero Based Budgeting Traditional BudgetingTraditional Budgeting

y Each expenditure to be 

 justified.y No present commitment.

y No balance to be carried for w ard.

y  A ctivities ranked according to priorit y.

y Sanction based on 

previous y ear¶s expenditure.

y Justif  y increase over last  y ear.

y Previous y ear¶s balances are carried for w ard.

y Past sales and expenditure trends are 

assumed to be continued.

Comparison

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Essentials Of ZBB

y Communication should be clear.

y Tailor-made ZBB.

y  A reas where ZBB is to be applied should be clear.

y Manuals should be prepared.

y Training Programs must be organized.

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Conclusion

In the end w e can sa y that, Zero Based Budgeting(ZBB) is the management tool which bridges the gap bet w een planning and results.

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