Zero Base

Budgeting

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INTRODUCTION

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 ZERO BASED BUDGETING
• Zero based budgeting is a process that involves developing a new
budget from scratch every time.
• Zero-based budgeting aims to put the onus on managers to justify
expenses and aims to drive value for an organization by optimizing
costs and not just revenue.
• ZBB enables the integration of top-level strategic goals into the
budgeting process by attaching them to particular functional areas of
the business, where expenses may be first aggregated and then
assessed against prior outcomes and current expectations.
• Zero-based budgeting may be done over several years , with
managers or group leaders reviewing a few functional areas at a time.
• By avoiding blanket increases or decreases to a previous period's
budget, zero-based budgeting can help lowering costs.
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HISTORY

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 Brief Background of ZBB
• Peter Pyhrr developed and created a ZBB system for Texas
Instruments as part of his responsibilities as accounting manager in
1962 is called “Father of ZBB Technique”.
• ZBB concept was popularized by Pyhrr in 1970 in an article in the
Harvard Business Review. Due to this the Governor of Georgia
Jimmy Carter was impressed and invited Pyhrr to join him in
adapting ZBB for Georgia’s 1972/73 budget.
• ZBB in India was implemented in 1983 in the domain of science and
technology.
• To determine the expenditure the Government of India adopted it in
1986. The Ministry of Finance made it mandatory for all
administrative ministries to review their respective programs and
activities in order to prepare expenditure budget estimates based on
Peter Pyhrr
the principles of Zero Based Budgeting. Father of Zero base Budgeting
• Rajiv Gandhi in 1986 adopted ZBB and implemented it in Defense
Minister.
• ZBB was later emphasized in the Seventh Five Year Plan (1988-93)
– Transportation sector. 6
BENEFITS

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 Benefits
• Efficiency: Zero-based Budgeting assists a firm in the effective
allocation of resources (department-wise) since it does not look at
prior budget figures, but rather at current data.
• Coordination and Communication: It helps in motivating employees
as they are involved in decision making and there is better
synchronisation within the department.
• Reduction in redundant activities: This approach helps us in
identifying cost efficient ways of doing things by eliminating all the
redundant or unproductive activities.
• Accuracy: Unlike the Traditional budgeting process, which entails
only a few random modifications to the previous budget, this
budgeting methodology requires all departments to relook at every
item of cash flow and calculate their operating expenses. To some
extent, this technique aids in cost reduction by providing a genuine
picture of expenses against intended performance.
• Budget inflation: As previously said, every cost must be justified.
The zero-based budget compensates for the shortcomings of
incremental budgeting of budget inflation. 8
FIVE STEPS OF ZBB

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5 Steps of ZBB

• Start. Begin at the beginning. Make a new yearly budget from the
ground up, without utilising last year's actuals as a foundation.
• Evaluate. Examine each cost area. Reduce or eliminate
unneeded activities or services.
• Justify. Account for all budget components. Determine cost-
effective, relevant, and cost-saving opportunities.
• Streamline. Determine which actions should be carried out and
how they should be carried out. Where feasible, automate and
standardise procedures.
• Execute. Implement thorough planning and execution
procedures. Make it a point to communicate specific plans, roles,
and duties.

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Example of ZBB

• Assume you own a hair salon where you sell shampoo and conditioner to consumers. You
paid $30,000 for these things from another firm last year.
• For the following year, you plan to employ zero-based budgeting. While analysing your costs,
you discover that you can produce your own hair products for less than the supplier's
pricing. You will save $22,000 by making your own items.
• When developing your zero-based budget, you would only budget $8,000 ($30,000 –
$22,000) for beauty goods.
• You also understand that you may reduce your reliance on ads. In this example of zero-based
budgeting, instead of spending $10,000, you just need to spend $3,000. You'd budget $3,000
for ads.
• And you discover that you can obtain a better deal from a different office supply company,
saving you $500. Your materials will now cost $1,000 rather than $1,500.
• If you built your next budget on the prior year's budget, you might not have recognised how
many costs you might eliminate. However, with zero-based budgeting, you ensure that every
dollar is counted.
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APPLICATION

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 Zero based budgeting in US
• In the United States, Texas Instrument Inc. pioneered zero-based budgeting in 1969. Jimmy
Carter, then-Governor of Georgia, was the first to implement the zero-base approach in
government for the drafting of the 1973 fiscal budget. Three years later, in The Government
Economy and Spending Reform Act of 1976, sponsored by the President and Congress, the
federal government embraced zero-base budgeting for the first time.
• During the late 1970s, President Jimmy Carter mandated that the federal government adopt
ZBB. "In 1977, the federal government implemented Zero-Base Budgeting (ZBB), an executive
branch budgeting procedure. Its primary focus was on maximising production at various
budgetary levels. Agencies were supposed to define priorities under ZBB based on programme
achievements that might be accomplished at various expenditure levels, one of which was to be
less than present financing.“
• Mostly in U.S., the main users of ZBB are the legislative, the executive and the agency. They
have to address 2 standard questions
1) Is the work you're doing now efficient and effective?
2) Is it necessary to terminate or reduce present operations in order to support higher-priority new
initiatives or to cut the current budget?
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 Zero based budgeting in US
Components of a public sector ZBB analysis
In general, three components make up public sector ZBB:
1. Identify three alternate funding levels for each decision unit (Traditionally, this has been a zero-base
level, a current funding level, and an enhanced service level.);
2. Determine the impact of these funding levels on program (decision unit) operations using program
performance metrics; and
3. Rank the program "decision packages" for the three funding levels.

In 1997, the US General Accounting Office (GAO) conducted a review of previous performance
budgeting projects and discovered that ZBBs' "primary focus was on optimising accomplishments
attainable at alternative budgeted levels

Elimination of ZBB from US

ZBB was formally phased out of government budgets on August 7, 1981. "Some budget process
participants, as well as outside observers, ascribed certain programme savings resulting from the
evaluation of alternatives to ZBB. ZBB included a mandate in federal budgets to:
Present alternate funding amounts;
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And Connect (them) to other outcomes.
This aspect of the ZBB budgeting procedure was in place under the Reagan, Bush, and
early Clinton administrations before being phased out in 1994.

Impact on government operations

Also, according to the National Conference of State Legislatures, "In its original
understanding, ZBB indicated that no previous choices are taken for granted." Every past
budget choice is being reviewed. Existing and planned programmes are on equal footing,
and the typical state practice of adjusting practically all existing budget lines by tiny
amounts every year or two would be eliminated. No state government has ever found this
to be practicable. Even Georgia, where Governor Jimmy Carter introduced ZBB to state
budgeting in 1971, used a heavily modified version.

ZBB has resulted in a major improvement in state budgeting to the degree that it has
prompted governors and lawmakers to examine the impact of minor adjustments in state
expenditure. However, in its traditional form – starting all budget evaluations from zero –
ZBB is as impracticable as it has always been."

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 Use in the Chinese public sector
The concept of ZBB was first introduced to China at the beginning of the 1990s and was primarily focused in the Hubei
Province area of China. Just as the United States encountered many problems and failures with ZBB, China ran into
them as well. But gradually adjusted appropriately since then, to become more effective in using ZBB as a budget
reform. Western influence on budgeting was non-existent in China before 1993. It was during the 1990s that China
began looking out for a new and modern form of budgeting for their country’s nationwide budget reform. They ended up
settling on ZBB. A new policy was set in place to put ZBB into action, known as the DBR, or the Departmental Budgeting
Reform. The DBR and ZBB were first implemented in the Hubei province of China.

Only a few departments implemented the budgeting system and the results of multiple departments using multiple
budgeting systems were not good. It slowly became clear that using ZBB in a traditional sense would not work out.
Officials in the Hubei province and the DBR began looking for ways to incorporate the best parts of ZBB and form a new
budgeting system that would work for their needs. The result of this change was a Chinese-styled Target-Based
Budgeting system. This form of budgeting required bureaucracies and agencies to submit a simple budget within a pre-
set time limit. TBB, as a modified form of ZBB, has worked out moderately well for the Chinese government in Hubei
over the years.

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Zero-based budgeting in
India
In India, the principle of ZBB was initiated in the
Department of Science and Technology in 1983. In 1986, the
Indian government adopted ZBB as a technique for
determining expenditure budget. The government made it
mandatory for all ministries to review their programme and
activities and prepare their expenditure estimations based on
ZBB concept. The state of Maharashtra attempted ZBB in
the eighties under the then finance minister Late Shrikant
Jichkar In seventh five-year plan, the ZBB system was
promoted. However, later not much progress happened in
this area.

In 2016-17 railways minister Suresh Prabhu also discussed

ZBB in allocation of resources for certain projects for Indian
Railways.

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 Use in Private sector
Walgreens Boots Alliance Inc
It is an integrated healthcare, pharmacy and retail leader serving millions of customers and patients every day, with a
170-year heritage of caring for communities.
Its purpose is to create more joyful lives through better health. 
Their vision is to be the leading partner in reimagining local healthcare and wellbeing for all.
They have their presence in 9 countries
How have they used Zero based budgeting?
According to a article in wall street journal the company has adopted the procedure of zero-based budgeting, a
decades-old cost-management strategy that is coming back in fashion, as part of a three-year plan by the drugstore
chain in order to cut 1 billion in annual cost
The belt-tightening approach requires managers to start from a budget of zero, justify every expense, assess the
benefits of spending patterns and rethink how to deploy resources to more swiftly achieve organizational priorities.
Walgreens has started a 16-week assessment of its global cost base, with an initial focus on the U.S. and U.K., its
two largest markets.
The benefits of deploying zero-based budgeting are plentiful. When managers approach existing operations with
fresh eyes, they can radically reshape their organization by channelling funds to areas that will drive growth.

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 Use in Private sector
Philip Morris International
Philip Morris International (PMI) is one of the world’s leading international tobacco companies.

Headquartered in New York City and listed on the New York Stock Exchange (NYSE: PM)PMI is building its future on
replacing cigarettes with smoke-free products that—while not risk-free—are a far better choice than cigarette smoking.

Their brands are known well around the world

How have they used zero based budgeting?

The company is shifting to an increasingly popular financial tactic among companies: planning each year’s budget from scratch
(zero based budgeting)The strategy, known as zero-based budgeting, is being implemented at Philip Morris to help free up
capital for new, alternative tobacco products. It comes as the company moves away from traditional tobacco producPhilip
Morris has moved to transform the company around its IQOS smokeless-tobacco technology as more people are aware of the
health risks surrounding traditional tobacco products and as regulation and taxation increase.

The company aims to trim $1 billion in costs over the coming three- year period

The first step is identifying areas for cost savings. The company is through the use of artificial intelligence, is looking at
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spending very granularly. The deployment of these tools makes the cost-cutting task less manual and less labour-intensive.
LITERATURE REVIEW
file:///C:/Users/Lenovo/Downloads/gx-us-operations-cons-
zero-based-budgeting.pdf
 Deloitte Case
• ZBB is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history.
• Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general, and administrative
costs; marketing costs; variable distribution; or cost of goods sold. When successful, ZBB produces radical savings and
liberates organizations from entrenched departments and methodologies. When unsuccessful, the costs to an organization
can be considerable.
• In ZBB-
• Budgets are not connected to prior year spending
• Budgets are tied to specific activities and levels of service
• Spending increases or cuts are not simply spread evenly across budgets
• Funding is targeted more to activities that align with the strategy
• In the public sector, this originated largely from contemporary fiscal constraints precipitated by the 2008 recession. A
survey by the Government Finance Officer Association (GFOA) shows that over 20% of respondents are using ZBB or
ZBB components, which represents a 50% increase compared to the period just before the 2008 recession.
• In private sector as well, for the 85% of CFOs who report above average levels of volatility and uncertainty since the
2008 recession, restrictive budgeting, including ZBB and its components, represents an opportunity to mitigate risks by
using aggressive cost reduction to support growth while reassessing both short and long-term strategies.

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• Potential Benefits-
• For organizations looking to grow by releasing capital through improved cost management, ZBB offers appealing
possibilities for reducing costs while bringing additional value in the form of operational efficiency. In a best-case
scenario, ZBB may reduce SG&A costs by 10 - 25% within six months.
• In private sector ZBB can help companies confront conventional thinking and resource allocations by challenging every
line item and assumption and helping the public sector in similar ways.
• Advantages-
• • Resulting budget is well justified and aligned to strategy
• • Catalyses broader collaboration across the organization
• • Supports cost reduction by avoiding automatic budget increases, often resulting in savings
• • Improves operational efficiency by rigorous challenging of assumptions
• Disadvantages-
• • Costly, complex, and time consuming as budget is rebuilt from scratch annually, whereas simpler and faster traditional
budgeting requires justification only for incremental changes
• • May be cost-prohibitive for organizations with limited funding
• • Risky when potential savings are uncertain
• • Execution challenged by budget cycle timing constraints
• • Typically requires specialized training or personnel to accomplish, and requires more resources in general
• • May be disruptive to the organization’s operations 22
• • Could harm organizational culture or brand.
• Challenges and risks-
• Completing a full ZBB cycle can be both challenging and risky for most organizations. Prioritizing program needs can be
threatening to some managers and can prove problematic for departments with intangible outputs. Most significantly, the
process itself is costly, complex, and time consuming. Especially compared to traditional budgeting, ZBB requires extra
time and specialized training, both of which represent added costs to an organization that may already be pressed for
resources. Using ZBB may pose a risk to a company’s brand. While ZBB in and of itself will not necessarily harm a
company’s brand, implementing ZBB can pose risks to customer experience and a company’s ability to price at a
premium.
• In response to these challenges and constraints, both private corporations and federal agencies can and do mitigate the
risks of a full ZBB cycle by adopting aspects of ZBB on a select function basis.

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THANK YOU
Submitted by:
Kushagra Sharma (201/2021)
Harshit Bansal (242/2021)
Samrridh Singh (206/2021)
Simran Shokeen (257/2021)
Swati (232/2021)
Abhiram Mallela (213/2021)
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