Pros and Cons of Zero-Based Budgeting

Zero-based budgeting is the budgeting wherein all the budgetary allocations for each department for the financial year are set at zero. The most important stipulation is that every financial-allocation-seeking department will justify their expenditure for the current year. The allocation of funds will be based only on the merits of their policy goals etc and not as per previous budgetary allotments. Mostly ZBB (zero-based budgeting) is encouraged for government budgets; but it can be applied to any private/public sector programs.

What Is ZBB?

As against traditional incremental budget, in ZBB, it is assumed that the organization is starting anew - right from the planning stage, especially for preparing budgets. Just because any costs or activities were present in the previous budget period, these will not be re-sanctioned automatically.  Everything will be looked at from a fresh perspective and judged as whether or not relevant. The traditional ‘last year plus x%’ allocation is not used but started afresh at zero.

Aims of ZBB:

  • All budgetary requirements need to be comprehensive, justified and complete.
  • To question the previously-set assumptions, assessing them and judging their relevance.
  • To help as a tool for systematic analysis, review and allotment of resources to any area that needs attention.
  • Channelizing funds to prioritized areas.
  • To measure the performance, accountability for every budget request.
  • Justify the costs and purpose in every budget cycle.
  • Relate costs to the missions/goals of the department.
  • Choosing the best from among the many developed ‘Decision Packages’ for every target.
  • Identify alternatives like directly doing a project or outsourcing it; whether the operation will be centralized or decentralized etc.
  • Allotting the responsibility of each project to the manager and the team.
  • Opportunity for in-depth operation review and making recommendations and changes for optimal completion of every project.
  • Increase staff motivation.

Advantages of ZBB:

  1. Assured efficient allocation of funds since it is based on needs and benefits and so avoids unnecessary expense.
  2. Improves the services as well utilizes cost-effective methods.
  3. Imposes a restraining influence during allocation of funds; contains any inflation.
  4. Controls the entitlement mentality by demanding justification for allotments.
  5. Budgetary allocations and discussions are meaningful and purposeful.
  6. Weeds out stale, ineffective and counterproductive activities.

Disadvantages of ZBB:

  1. Preparation time and expense of the budget are increased.
  2. Sometimes ZBB sounds too radical and so consensus is difficult to obtain.
  3. Too many decision packages may be needed for a very large organization.
  4. Needs commitment and professional attitude to ensure proper implementation.
  5. Justifying every expense may not be feasible or practical.
  6. Departments like Research & Development may find cash-crunch.
  7. All managers and staff should be educated and trained about concepts of application of ZBB.

Tips:

  • Should not be used indiscriminately or too frequently. A healthy time-gap is needed for realizing full potential of ZBB.
  • If applied intelligently, ZBB offers a lot of advantages and is a useful tool to curb inflation and unnecessary expenditure.

You should look into the pros and cons of zero based budgeting and then only try it.

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