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Zero Base Budgeting

  1. ZERO Based Budgeting Dr. Kulrajat Bhasin
  2. Contents  Definitions  Budget and types  Zero base Budgeting  Historical development  Steps Involved 1. Decision Units 2. Decision Package 3. Decision Making  ZBB Approach  Advantages  Limitations  Conclusion  Alternatives to ZBB  PPBS
  3. What is a Budget?  A budget can be defined as a quantitative expression of the operational plans of an organisation for a future accounting period.  Usually prepared for a period of one year but may be prepared to coincide with the seasonal needs or other factors as per requirement.  It is both, a plan of action as well as control medium.  The 3 essentials of a budget:  Prepared in advance based on future plan of action.  Relates to future period and based on objective to be achieved.  Is a monetary statement that makes the management think, plan and act as a team to render better medical service at affordable costs. Organisation Activities Resources (manpower, material, machinery) Money
  4. Traditional Budget Revenue Budget Capital Budget Income budget Expenditure Budget  Hospital service charges i.e. Beds, OTs, OPD, Diagnostics, Consultations  Auxiliary services i.e. Blood bank, Ambulance, Canteen, Telephone, Parking, Chemist, Laundry and linen  Miscellaneous i.e. Rent, sale of scrap  Investments i.e. FD’s, Dividends  Donations  Grants  Employee cost • Management • Medical • Nursing • Para medical • Engineering • Unskilled • Admin and accounts  Materials & supplies  Dietary services  Maintenance  Other hosp expenses  Office expenses  Interest  Depreciation Investment in long term assets.  Balance from revenue budget  Loans to finance capital projects  Disinvestment of assets
  5. Definition  Zero Base Budgeting has been defined as a planning and budgeting process required by each manager to:  Establish objectives for his function.  Define alternative ways of achieving the objectives.  Selecting the best alternative so as to achieve these objectives.  Break that alternatives into incremental levels of efforts.  Costs and benefits of each incremental levels.  Describe the consequences of disapproval.  Zero Base Budgeting is a method of budgeting in which all expenses must be justified for each new period. Zero base budgeting starts from a ‘Zero-base’ and every function within an organization is analysed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.  ZBB is a technique which complements and links the existing planning, budgeting and review processes. It identifies alternative and efficient methods of utilizing limited resources in the effective attainment of selected benefits.
  6. Definition…  The Objective of Zero Based Budgeting is to “reset the clock” each year.  The Traditional incremental budgeting assumes that there is a guaranteed budgetary base-the previous year’.  Zero Based Budgeting implies that managers need to build a budget from the ground up, starting at zero.  Resources are not necessarily allocated in accordance with previous patterns and consequently each existing item of expenditure has to be annually re- justified.  Purpose - ZBB is to reevaluate and reexamine all programs and expenditures for each budgeting cycle by analyzing workload and efficiency measures to determine priorities or alternative levels of funding for each program or expenditure.  Through this system, each program is justified in its entirety each time a new budget is developed
  7. Historical Development - ZBB  Zero-base budgeting (ZBB) became popular in the 1970s but the concept has been around since as early as 1924 when British budget authority E. Hilton Young advocated complete justification of every item requested in a budget.  Peter Pyhrr, who created and developed a ZBB system for Texas Instruments as part of his responsibilities as control administrator in 1962 is called "Father of ZBB technique“.  In 1962 the U.S. Department of Agriculture adopted a ground-up system of budgeting which is considered to be the first formal use of ZBB in the U.S. government.
  8.  The process finally evolved into the current ZBB concept, which was popularized by Pyhrr in 1970 in an article in the Harvard Business Review. Jimmy Carter, then Governor of Georgia, read his article, was impressed with it, and invited Pyhrr to join him in adapting ZBB for Georgia's 1972/1973 budget. Carter was so enthusiastic about the system that, when he became President, he ordered all federal agencies to implement a ZBB system by 1979.  The concept of ZBB soon spread throughout both the public and private sectors with mixed results and was the subject of many articles in the 1970s, although Ronald Reagan dropped ZBB during his tenure as President. Historical Development - ZBB
  9. Historical Development - ZBB- India  In India, ZBB was implemented in Science & Technology in the year 1983  It was adopted by Govt India in 1986 as a technique for determining expenditure budgets. The Ministry of Finance made it mandatory for all the administrative ministries to review their respective programs and activities in order to prepare expenditure budget estimates based on the principles of zero-base budgeting.  In 1986, Rajiv Gandhi eager to take India into the 21st century, wished to adopt zero-based budgeting (ZBB) & tried to implement ZBB in Defense Ministry also.  ZBB was later emphasized in the Seventh Five year Plan(1988-93) – Transportation sector.  The Maharashtra government renamed and used it as development based budget.  However not much progress in this regard has happened on this area since.
  10. ZBB in India…  While introducing ZBB, the Govt of India had issued a questionnaire to be filled for each programme some of which are:  Are there other agencies performing the same activity and if yes is it necessary to continue the same? Can we not eliminate?  What changes would you suggest to make the activity/programme more affective and achieve the objective in a cost effective manner?  If additional funds say 25% are given, what would be the benefit?  If allotment of funds is cut say 25%, what would be the adverse consequences?
  11. Steps involved in ZBB 1. Identification of decision units. 2. Analysis of each decision unit through development of decision packages. 3. Evaluation and ranking of decision packages to develop the budget. 4. Preparing the budget including those decision packages which have been approved.
  12.  A ZBB decision unit is an activity/programme or department for which decision packages are to be developed and analysed. It can be described as a cost or a budget centre. Managers of each decision units are responsible for developing a description of each programme to be operated in the next fiscal year. For e.g. In a district, the decision units could be different specialist clinics, programme units, hospital OPD unit, dispensaries or individual PHC’s.  A specific manager should be clearly responsible for the operation of the program.  Identify and describe a particular activity.  It must have well defined & measurable objectives.  It must have well defined & measurable impacts. Defining a decision unit…
  13. Development of Decision packages  After the identification of appropriate decision units, the next step is to prepare a document for each of these describing the objectives or purposes of the decision unit and the actions that could be taken to achieve them. Such document is called “Decision Package”. 1. Mutually exclusive – Contains alternative ways of doing a job. 2. Incremental – Defining different levels of efforts Decision packages will have work packages Costs, returns, purpose, expected results, alternatives available, Consequences if activity is not performed or reduced. Example -  A specialist clinic can be a referral unit with only diagnostic facilities, the treatment and after care being done at district and PHC level.  Equipment i.e. an X Ray unit may have just a vertical unit, or an additional horizontal unit, or a unit for bedside operation.  Increased emergency beds and less normal beds.
  14. Decision Making - Review And Ranking Of Decision Package  Deciding to accept or reject or amend the activity.  There is always a certain minimum level of effort in decision units which have to be necessarily performed (high priority units) –funds to be committed.  Once the decision packages have been prepared, they are ranked on an ordinal scale i.e. 1st, 2nd, 3rd, etc in order of priority using Cost benefit Analysis.  Surplus funds are then allocated to these decision packages. Take a Decision Package: 1. Is the activity under our control. 2. Recognize less effective activities. 3. Validate – Arrangements(Elimination) 4. Make the activity profitable
  15. ZBB Approach  As an example: consider 4 functions/activities to be performed by a decision unit – decision packages A,B,C and D.  Decision package A – OPD can have 3 alternatives  A1 - OPD giving only Allopathic treatment  A2 - OPD Allopathic + Ayurveda  A3 - OPD Allopathic + Ayurveda + Homeopathy  Decision package B – Pathology unit  B1 – Basic Path lab with referral services  B2 – Well equipped Path Lab  Decision package C – Specialist clinics  C1 – Child care unit  C2 – Family welfare clinic  C3 – Orthopaedic rehabilitation centre  C4 – Leprosy clinic  Decision package D – X-ray Unit  D1 – Single vertical machine  D2 – additional horizontal bed machine  D3 – well equipped Radiology department.
  16. ZBB Approach  Having identified the different decision packages and different alternatives, the next decision is to prioritise alternatives A 3+ B 2+ C 4+ D 3 12 alternatives The absolute basic minimum need would be to have : 1. OPD with Allopathy A1 2. Basic Pathology lab B1 3. Child care unit C1 4. Family welfare C2 5. Single vertical X-ray D1 These are now ranked as D1 – C2 – C1 – B1 – A1 Funds – in order of priority i.e. well equipped radiology department. Prioritisation depends on the specific needs of the particular district/hospital/PHC and may be pre determined.
  17. Decision Ranking Process Function Function Function Function A B C D A3 A2 A1 B1 B2 C1 C2 C3 C4 D1 D2 D3 A1 B1 C1 C2 D1 D2 A2 A3 B2 D3 C4 Future Budget Minimum Needs Order of priority
  18. Traditional Budgeting Vs. Zero Base Budgeting Basic Difference Traditional Budgeting Zero Base Budgeting Emphasis It is accounting oriented; emphasis on “How Much” It is more decision oriented; emphasis on “Why” Approach It is monitoring towards the expenditures It is towards the achievement of objectives Focus To study the changes in the expenditures To study the cost benefit analysis Communication It operates only Vertical communication It operates in both directions horizontally and vertically Method It is based on the extrapolation i.e. from the yester figures future projections are carried out Its decision package is totally based on the cost benefit analysis.
  19. Advantages Of Zero Base Budgeting  Out of date inefficient operations are identified.  Allow managers to quickly respond to changes in external environment.  It Promotes questioning and challenging attitudes.  It ensures efficient use of limited resources by allocating them according to the relative importance of the programs.  The annual review of the programs indicates the relative worth of the programs and thus ensures no programs continues beyond its productive life.  It helps the management to design and develop cost-effective techniques for improving operations.  The corporate objectives can be achieved more successfully under zero- base budgeting.  The establishment of decision units makes the performance evaluation system more effective.
  20. Limitations of Zero Base Budgeting  Increased paper work.  Cost of preparing many packages.  Subjective ranking.  More emphasis on short term benefits and Qualitative benefits are ignored.  Small organization cannot afford it.  The identification of decision units and decision packages creates number of problems for the organization(Decentralized).  The process of zero base budgeting requires experiences, intelligence, expertise, and continuous training on the part of executives. Thus , it is not suitable for an ordinary organization.
  21. To Conclude…
  22.  ZBB is clearly not for everyone. Here are the three major alternatives:  Priority budgeting. Under this system, the government first determines how much revenue it has available, then identifies the community’s most important priorities, and then allocates resources to the priorities rather than directly to departments. Programs are ranked according to how well they align with the priorities. This form of budgeting focuses on determining which services the government should offer in order to get the most value from the tax money. Hence, it too is a non incremental form of budgeting - an alternative to ZBB. What Are The Alternatives To ZBB?
  23.  Program review. Program review is a planning method used to examine, outside of the budget process, how a program is provided. It can answer several important questions, for example: What services should we be in the business of providing? For those services we do offer, what level of service should we provide? Are we providing that level of service efficiently? Program review answers these questions outside the pressures of the budget process, and thus may be more successful than ZBB in finding real alternatives.
  24.  Target-based budgeting (TBB). Unlike ZBB, TBB makes no attempt to re-examine base spending. Rather, each decision unit is given a target spending amount (for example, 90 percent of what was spent last year) and is asked to submit a budget for that amount. The total target for the organization is necessarily less than what is affordable. This is because the difference between the target and what is affordable is used to fund additional activities through decision packages. TBB is a significant improvement on incremental budgeting but is much less intensive than ZBB.
  25. PPBS  Is another useful management technique  Involves decision making since it includes  Selecting objectives  Strategies  Policies  Programs and procedures For e.g. setting up a hospital involves:  Setting goal  Study of external environment of hospital  Allocation of internal resources  Analysing section of population to serve  Geographical area to be covered  Variety of services to be provided  Quality level to be enforced  Equipment to be provided  Manpower to be recruited and trained. Planning
  26.  Preparation of detailed plan of action  Time required for each process  Identifying likely problems  Total time for completion of project  Financing and annual reviewing exercise  Work up of a time table Programming Budgeting Scheduling
  27. References  National Institute Of Health And Family Welfare, Module On Financial Management, New Delhi, 2003. P20-49.  Peter A. Pyhrr, Zero- Based Budgeting” A practical Management tool for evaluating expenses, New York, Willey & Sons , 1973  Singh G, Yadav P, Zero Based Budgeting In India-its Relevance To Public Enterprises, Asian Journal of Technology & Management Research, Vol. 01 – Issue: 01 (Jan - Jun 2011): p1-13.  V.G.K Murthy, Budgeting A Guide for Practicing Managers, Sterling Publications, New Delhi, 1984.  Peter C. Sarant, “Zero-Based Budgeting in the Public sector-A Pragmatic Approach-Addision-Wesley Publishing Company-1977.  Paul J. Syorich, “Zero-Based Planning and Budgeting Dow Jones, New York, 1977.
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