Zero Based Budgeting

Zero based budgeting is a technique of planning and

decision making which reverses the working process
of traditional budgeting.
The term “Zero based budgeting” is sometimes used
in personal finance to describe the practice of
budgeting every dollar of income received, and then
adjusting some part of the budget downward for
every other part that needs to be adjusted upward.
It would be more technically correct to refer to this
practice as “active balanced budgeting”.
 Historical development of ZBB

ZBB or some modified version of it, has been used in the private-
and public -sectors for decades. The first known application of zero-
base budgeting was by the U.S Department of Agriculture in 1962.
However, the general problem of incremental budgeting that zero-
base budgeting attempts to solve has been recognized from a much
earlier period.
Indeed, the major next application of ZBB in government has been
tracked back to GOV. Jimmy Carter’s use of it in Georgia in the early
1970s.
In the private sector, the major leap forward occurred with the
development at Texas Instruments Inc. of a way to handle the mass
of data. This involved the implementation of a “Decision Package”
approach to prepare the 1970 budget for the Staff & Research
Divisions.
 Application of ZBB

The practical application of ZBB involves the use

of the “Decision Package”. All budgetary
procedures involve an identification of
organizational objectives. In the context of these
objectives, ZBB involves three stages:
1. Identification of decision units.
2. Development of decision package.
3. Review and ranking of decision packages.
 Advantages
• Efficient allocation of resources, as it is based on needs and
benefits.
• Drives managers to find cost effective ways to improve
operations.
• Detects inflated budgets.
• Municipal planning departments are exempt from this budgeting
practice.
• Increases communication and co-ordination within the
organization.
• Identifies and eliminates wasteful and obsolete operations.
• Identifies opportunities for outsourcing.
• Useful for service departments where the output is difficult to
identify.
 Disadvantages
 Difficult to define decision units and decision packages, as it is
time-consuming and exhaustive.
 Forced to justify every detail related to expenditure. The R&D
department is threatened whereas the production department
benefits.
 In a large organization, the volume of forms may be so large that
no one person could read it all. Compressing the information
down to a usable size might remove critically important details.
 Honesty of the managers must be reliable and uniform. Any
manager that exaggerate skews the results.
 Necessary to train managers. Zero based budgeting must be
clearly by managers at various levels to be successfully
implemented. Difficult to administer and communicate the
budgeting because more managers are involved in the process.