Monday, February 17, 2014

zero base budgeting

Zero-base Budgeting 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 and recommended for application to the federal budget for some time. For government use, this planning and budgeting technique endeavors to redirect effort and funds from lower priority current programs to higher priority new programs, improve efficiency and effectiveness, and reduce spending.
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 expenditures to reach the proposed budget total. A major flaw in incremental budgeting is that it assumes the current year’s expenditure level is justifiable and this may not be true. It may be either too high or too low.
Zero-base budgeting, on the other hand, is a detailed and concentrated study of those activities that might be considered costly or ineffective and that continue to be funded primarily because they are never examined.
It may be useful for one or more government programs to be subjected to zero-basebudget analysis every year. In such an analysis it is not assumed that the current year’s spending for a particular program is justified. On the contrary, the wisdom of spending any money at all on the program is examined.
These questions are typical for analyses of this type:
Is there any measurable evidence of the value of the program under review?
Are the goals and objectives of the program important enough to warrant the expenditure being made?
What would happen if the program were not provided at all?
Are there other less costly and more effective ways of achieving these objectives?
Where would the program fit in if all programs were displayed in order of importance?
Would the benefits be greater if a portion of the funds spent on the program under review were used instead for other programs?
An important element of this budgeting procedure is that it forces prioritization of government programs and activities. With the prospect of insufficient revenue to match the demand for 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.
There are two basic steps to the process of zero-base budgeting. 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.
Conceptually, zero-base budgeting is a systematic logical approach to allocating limited resources where they will do the most good.
Modified Zero Based Budgeting
Service-level budgeting is a modified zero-base budgeting approach. This concept matches spending levels with services to be performed. Under zero-base budgeting, a great deal of effort can be devoted to documenting personnel and expense requirements that are readily accepted as necessary. Modified zero-base budgeting can avoid this by starting at a base that is higher than zero. An appropriate starting point for a jurisdiction might be 80 or 85 percent of current spending levels. High-priority requests above this level could be identified to restore part or all of the current year’s service levels. Desirable new programs could also be considered for funding. As a result, a legislative body might be presented the choice of reducing some current operations in favor of adopting a new program. Thus a new program might be funded out of savings incurred by reduction of an existing program. The phrase “service-level budgeting” is in some cases a better description for this process.

Budgeting: Planning and Control System
  • Budgeting is a management planning and control system.
  • Budgeting process consists of deciding the objectives of an organization for a defined period, say one year and breaking them down into detailed objectives and activities required to meet them. Activities throw up the requirement of resources.
  • Based on this, the yearly financial plan is made. It is calculated as to how much money will be needed to perform the desired activities for achievement of the objectives.
  • These plans are made at every departmental level and then integrated at the organizational or corporate level.
  • Entire process aims at justification of the financial allocations for every objective and every job.
  • The budgets thus drafted are studied for viability of the expected profitability in the organization and finally, new draft of budget is prepared by making necessary changes in the budget. The final budget is then approved by the management.
  • The actual expenditure is then compared and controlled throughout the year so that it remains within the approved budgets and predicted profitability is achieved.
Conventional Budgeting
  • Departments prepare their budgets based on the previous year's budgets.
  • Departments justify only the increases in the expenses required for the current year; they need not have to justify the expenses/budget already approved in the previous year.
  • It is taken for granted that the previous year's expenses will have to be made in any case to maintain the regular business level.
Zero Based Budgeting: Unconventional
  • In contrast to conventional budgeting, zero based budgeting system in unconventional.
  • It is not based on previous year's budget.
  • It is not formulated by just incrementing the previous year's expenditure for the current year.
  • It starts with zero base. It's a clean slate approach.
  • Departmental objectives are decided within the frame work of corporate or organizational objectives and then broken down into detailed objectives and activities/tasks.
  • The resources and therefore, the expenses required to acquire and use those resources are calculated at the current market conditions.
  • Additionally, at every step, questions are asked whether the activities to be undertaken to achieve the objectives are value adding and the scopes of improvements in business, administrative and technical processes are thought of.
  • Overall cost control and cost management are the important key aspects in drawing the zero based budget.
  • The budget thus formulated may be lower than or equal to or higher than the previous year's budget. But looks like, that it is necessary to allocate and use that kind of money for better performance and better profitability.
  • This kind of budget seems more realistic and more precise.
  • The expenditures can now be controlled and profits as predicted realized with lot more surety.
Advantages of Zero Based Budgeting
  • It questions the current budgets/expense levels, the effectiveness and efficiency of current processes.
  • Thus, overall cost management/control is in-built.
  • It focuses on corporate or organizational objectives and within them, the departmental objectives. Thus budget supports their achievements; it supports the overall business very effectively.
  • It drives the departments' plans and so, the planning process starts right away with the formulation of the budgets right at the beginning of the year.
  • Ultimately focuses on value for money (VFM).
  • It is based on current market and business realities and therefore, more realistic.
Disadvantages of Zero Based Budgeting
  • More time and effort are required in zero based budgeting as compared to the incremental or conventional budgeting.
  • Questioning the current ways of doing business may be threatening to some people within the organization.
  • Deciding the departmental objectives within the frame work of organization objectives necessitates top down communication of these objectives with lots of clarity. This is often not done.