This document provides an overview of zero-based budgeting (ZBB). It describes ZBB as a technique that sets all budgets to zero at the beginning of each period, requiring departments to justify all expenditures. The key milestones in implementing ZBB are developing decision packages to analyze each activity, ranking the packages by importance, and allocating resources according to the ranking. The document contrasts ZBB with incremental budgeting, which uses the previous period's budget as a base and adds incremental amounts without reconsidering needs.
2. Zero-Based Budgeting
• A technique of planning and decision-making
which reverses the working process of
traditional budgeting
• It 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.
3. Zero Based Budgeting
• A technique that sets all budgets to nil at the
beginning of the year or period and requires from
the departments that they justify all of their
expenditures, not just those exceeding the
budget.
• Money is allocated to the departments based on
merit and not based on the previous year budget
plus or minus some percentage such as in many
traditional budgeting systems.
•
4. Scope
• To redirect effort and funds from lower priority
current programs to higher priority new programs
• To improve efficiency and effectiveness
• To reduce spending
• Its aim is to achieve is an optimal allocation of
resources
• Managers are asked to identify and justify their
areas of work in terms of decision packages prior
to starting the work.
5. Scope
• ZBB forces prioritization of government
programs and activities
• With the prospect of insufficient revenue to
match the demand of 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
• Conceptually, ZBB is a systematic logical
approach to allocating limited resources where
they will do the most good.
6. Traditional Budget
• 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 expenditure to reach the proposed
budget total
7. Applications
• ZBB can be applied usefully to budget heads such
as repairs, maintenance or equipment costs.
• The traditional incremental approach often pays
scant attention to these heads, perhaps at best
looking at trends over 2 or 3 years, and very often
simply taking “last year plus x%”. But it is often
possible for service priorities to be proposed,
discussed and established without reference to
previous years.
• Successful use of ZBB relies upon the effective
involvement of all executive managers
8. The Process of ZBB
Two basic steps:
• 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.
9. What is different about ZBB
• With zero-based processing one can forget
about last year, pretend that the program is
brand-new, and see if one can provide a
detail of expenses for what one would need
to fully accomplish the program
• This technique will help one to develop a
complete picture of what the program
actually needs to cost and not just what
it has been costing
10. Advantages
• Efficient allocation of resources, as it is based on
needs and benefits
• Helps to find out cost effective ways to improve
operations
• Increases staff motivation by providing greater
initiative and responsibility in decision-making
• Increases communication and coordination within
the organization
• Identifies and eliminates wastage and obsolete
operations
• Identifies opportunities for outsourcing
• Focuses on value for money
11. Disadvantages
• Adds to the time and effort involved
in budgeting
• Difficult to define decision units and
decision packages, as it is very timeconsuming and exhaustive
• Forced to justify every detail related
to expenditure
• Necessary to train managers.
13. A – Developing Decision Packages
• The “decision package”refers to
an analysis of each discrete
activity, according to cost and
purpose
• Consider the benefits of the
activity, alternative courses of
action, how to measure
performance
14. Developing Decision Package (contd)
• This milestone can be broken down further:
Stage 1 – Defining the Scope of ZBB
Decide which parts of the
organization are to be assessed using ZBB
Stage 2 – Identify the resources
• This stage falls into 2 parts:
• The identification of the schedule of input resources that will be
required in order to deliver the outputs The identification of the
individuals who will take responsibility for assessing the various
options.
Stage 3 – Objective matching stage
• It is possible that objectives may be deliverable at different service
levels, and in these cases, the review should identify, as a
minimum:
Basic level of service
Current level of service
Any step changes in service
15. B – Ranking the decision packages
• The decision packages should be
evaluated and ranked in order of
importance
• Performance measurement tools
including cost/benefit analysis
are clearly a very important
component
16. C – Allocating resources
• The ranking list then results in a
priority order for the allocation of
resources
• The most important activities are
funded, whether they are existing
ones, or new
• The final budget will be made up of
the decision packages that have been
approved for funding.
18. Incremental Budgeting
• Uses a budget prepared using a previous
period’s budget or actual performance as a
base, with incremental amounts added for
the new budget period
• The allocation of resources is based upon
allocations from the previous period
• It fails to take into account changing
circumstances
• It leads to a “spend it or lose it” mentality.
19. Advantages
• The budget is stable and change is gradual
• Managers can operate their departments
on a consistent basis
• The system is relatively simple to operate
and easy to understand
• Conflicts are avoided when departments
appear to be treated similarly
• Co-ordination between budgets is easier to
achieve.
20. Disadvantages
• Assumes activities and methods of working will
continue in the same way
• No incentive for developing new ideas
• No incentive to reduce costs
• Encourages spending up to the budget so that
the budget is maintained next year
• The huge amount of work involved
• May lead to micro management, offering less
time and energy for the things that really matter.