Budget and types
Zero base Budgeting
1. Decision Units
2. Decision Package
3. Decision Making
Alternatives to ZBB
What is a Budget?
A budget can be defined as a quantitative expression of the
operational plans of an organisation for a future accounting
Usually prepared for a period of one year but may be prepared to
coincide with the seasonal needs or other factors as per
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,
Revenue Budget Capital Budget
Income budget Expenditure Budget
charges i.e. Beds, OTs,
Auxiliary services i.e.
Chemist, Laundry and
Rent, sale of scrap
Investments i.e. FD’s,
• Para medical
• Admin and
Materials & supplies
Other hosp expenses
Investment in long term
Balance from revenue
Loans to finance
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.
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-
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
Through this system, each program is justified in its entirety each time a new
budget is developed
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.
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
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
ZBB was later emphasized in the Seventh Five year Plan(1988-93) –
The Maharashtra government renamed and used it as development
However not much progress in this regard has happened on this area
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
Steps involved in ZBB
1. Identification of decision units.
2. Analysis of each decision unit through development of
3. Evaluation and ranking of decision packages to develop the
4. Preparing the budget including those decision packages which
have been approved.
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
Identify and describe a particular activity.
It must have well defined & measurable objectives.
It must have well defined & measurable impacts.
Defining a decision unit…
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.
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.
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
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.
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.
Decision Ranking Process
Function Function Function Function
A B C D
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
It is towards the
achievement of objectives
Focus To study the changes in the
To study the cost benefit
Communication It operates only Vertical
It operates in both
directions horizontally and
Method It is based on the extrapolation
i.e. from the yester figures
future projections are carried
Its decision package is
based on the cost benefit
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
It helps the management to design and develop cost-effective techniques
for improving operations.
The corporate objectives can be achieved more successfully under zero-
The establishment of decision units makes the performance evaluation
system more effective.
Limitations of Zero Base Budgeting
Increased paper work.
Cost of preparing many packages.
More emphasis on short term benefits and Qualitative benefits are
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.
ZBB is clearly not for everyone. Here are the three major
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?
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
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.
Is another useful management technique
Involves decision making since it includes
Programs and procedures
For e.g. setting up a hospital involves:
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.
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
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.