Zero based and performance based budgeting

ZERO Based
&
Performance based .
Budgeting

VINEET AGGARWAL
SHIVANI HASIJA
MUKUL DUDEJA
VIKRAM
MANISH
HARISH
MANOJ KOHLI
YASH

PRESENTED BY
 SHIVANI HASIJA

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

Importance of Budgeting:
Why Should I Budget?
 A Process of tracking your expenses
 A safety valve to prevent over expenditures
 Financial control of inputs
 Management of ongoing activities
 Planning and setting priorities
 Accountability
 Ensures that the finances are spent for true purpose of spending.
Controlling your financial affairs requires a budget. For many
people, the word "budget" has a negative connotation. Instead of
thinking of a budget as financial handcuffs, think of it as a means to
achieve financial success.
 Whether you make thousands of dollars a year or hundreds of
thousands of dollars a year, a budget is the first and most important
step you can take towards putting your money to work for you
instead of being controlled by it and forever falling short of your
financial goals.

Importance of Budgeting:
Why Should I Budget? (cont)
 To those of you my Fellows..!! who think you know where your money goes
without keeping detailed records, I issue this challenge: keep track of every
cent you spend for one month. I promise you'll be surprised and perhaps
shocked by how much some of your "small" expenditures add up to.
 Budgeting and tracking your expenses gives you a strong sense of where your
money goes and can help you reach your financial goals, whether they are
saving for a down payment on a house, starting a college fund for your kids,
buying a new car, planning for retirement, paying off the credit cards, or
saving for that trip to Ayubia.

Types of Budgeting
1. The Traditional Line-Item Budget
2. Incremental Budgeting
2. Zero Based Budgeting (ZBB)
3. Performance based Budgeting (PBB)

1. Line-Item Budget
The traditional line-item budget, wherein legislators specify
allowable spending on inputs (salaries, supplies, travel) was
first developed to guard against the misuse of public funds.
Line Item Budgeting is arguably the simplest form of
budgeting, this approach links the inputs of the system to the
system. These budgets typically appear in the form of
accounting documents that express minimal information
regarding purpose within the system.

2. Incremental Budgeting
Often used with line-item budget, assumes that
funding for existing programs will continue at
about the same level as in the past.

3. Zero Based Budgeting (ZBB)
 Zero-based budgeting, by contrast, assumes the previous
year’s budget to be quite irrelevant and begins from scratch
to identify and cost all of the inputs that will be required to
achieve the desired level of activity.
 Zero-based budgeting is a response to an incremental
decision making process where the budget of a given fiscal
year (FY) is largely decided upon by the existing budget of
FY-1. In contrast to incrementalism, the allocation of scarce
resources—funding—is determined from a zero-sum
accounting method.

4. Performance Based Budgeting (PBB)
 Performance budgeting aims to improve the effectiveness
and efficiency of public expenditure, by linking the funding
of public sector organizations to the results they deliver.
 It uses systematic performance information (indicators,
evaluations, program costings etc) to make this link. The
impact of performance budgeting may be felt in improved
prioritization of expenditure, and in improved service
effectiveness and/or efficiency.

PRESENTED BY
 VINEET AGGARWAL

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

Presentation 1
ZERO BASED BUDGETING

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.

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.

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

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
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.

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?

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.

 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…

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.

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

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

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.

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.

 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?

 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.

 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.

 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

PRESENTATION 2
PERFORMANCE BASED .
BUDGETING

PERFORMANCE BASED BUDGETING (PBB)
Performance budgeting aims to improve the effectiveness and
efficiency of public expenditure, by linking the funding of
public sector organizations to the results they deliver.
It uses systematic performance information (indicators,
evaluations, program costings etc) to make this link. The
impact of performance budgeting may be felt in improved
prioritization of expenditure, and in improved service
effectiveness and/or efficiency.

Performance Based Budgeting attempts to solve decision
making problems based on a programs ability to convert inputs
to outputs and/or use inputs to affect certain outcomes.
Performance may be judged by a certain program's ability to
meet certain objectives that contribute to a more abstract goal
as calculated by that program's ability to use resources (or
inputs) efficiently—by linking inputs to outputs—and/or
effectively—by linking inputs to outcomes. A decision making—
or allocation of scarce resources—problem is solved by
determining which project maximizes efficiency and efficacy.
Performance budgets hold agencies accountable for what they
achieve

Managing for Results (MFR)
 Performance budgeting should be viewed in the broader
context of a set of related “managing for‐results” (MFR)
reforms.
 MFR can be defined as the use of formal performance
information to improve public sector efficiency and
effectiveness. Its fundamental starting point is maximum
clarity about the outcomes which government is attempting to
achieve, and about the relationship of outputs, activities and
resources used to those desired outcomes.
 Good strategic planning and business planning are an
essential element of MFR.

The Basics of PBB
 Objectives.. Organizations should develop strategic plans of what
they intend to accomplish. These plans should contain objectives
based on outcomes that the public values.
 Performance Measures… Based on their strategic plans,
organizations should develop specific, systematic measures of the
outcome that can be used to determine how well organizations are
meeting their objectives. E.g. mortality rates for health programs.
 Linkage… Objectives and performance measures are integral parts
of budgetary process. Appropriations are linked to organizations
results; how well they are meeting their objectives as indicated by
performance measures.

Performance Information Fundamentals
 “Outcomes” and “outputs” play a central role in all models of
performance budgeting, and it is essential for any discussion
of performance budgeting that these and related concepts
are clearly understood.
Performance Concepts: the Results Chain
 In the results chain framework, outputs are produced using
inputs (resources) via activities and processes, and outputs
generate outcomes for the community.

Outputs
 Outputs are goods or services – the “products” – which a
ministry or other government organization delivers to
external parties.
 This usually means services delivered to or for the direct
benefit of the community. Examples of outputs include:
medical treatments; advice received by farmers from
agricultural extension officers; students taught; and police
criminal investigations.
 Most government outputs are services.

Outcomes
 Outcomes are the intended impacts of outputs – more precisely,
the changes brought about by public programs upon individuals,
social structures, or the physical environment. Health inspections
of restaurants are an output, the intended outcome of which is that
fewer diners fall sick. Criminal investigations are a police output,
and reduced crime the outcome.
 Many government services aim to achieve more than one outcome.
For example, school education aims to increase the level of
education of the population. But it also aims, amongst other things,
to improve economic performance. Both a higher level of education
and a stronger economy are outcomes. Because it is by means of the
first of these that the second is achieved, a more educated
population is said to be an intermediate outcome, and a stronger
economy a higher‐level outcome.
 The relation between proximate and high‐level outcomes is one of
logical causality (i.e. the proximate outcomes induce the high‐level
outcomes).

 The way in which outputs are produced is conceptualized in the
results chain in exactly the same way as the use of inputs in
production activities and processes.
 For example, the treatment which seriously injured person
receives in hospital involves the use of a set of inputs (skilled staff,
operating equipment and facilities, medical supplies, electricity etc)
and a set of activities including anesthesia, surgery and nursing, as
well as supporting activities such as supplies and facility
management.

Inputs
 Inputs, as this example indicates, refer to all inputs, assets and
capabilities which are or may be drawn on in the production process
to deliver the outputs and outcomes desired.
 Although “inputs” is the conventional results chain term, and
therefore will be used here, the term “resources” actually captures
better the scope of what is referred to.
 Thus inputs which contribute to the capability to deliver results
include not only equipment and buildings by, for example,
organizational culture and staff morale.

Activities
 The term activities may seem self‐explanatory, but confusion
between activities and outputs is very common. Some examples can
help avoid this confusion:
 In a hospital, anesthesia and cleaning are activities rather than
outputs because they are components of the overall service provided
to the patient, rather than the complete
service.
 The patient can’t recover through anesthesia or cleaning in isolation,
and it is only via the combination of all the necessary activities that
the complete service (the output) is
delivered.

Performance Measures and the Budget…
 There are two basic types of performance information:
performance measures and evaluation..
 Performance Indicators
 Performance indicators are quantitative measures which provide
information on the effectiveness and efficiency of programs and
organizations. An indicator is representative to the degree to which it
succeeds in measuring the dimension of performance which it seeks
to measure.
 Performance indicators should be selected according to the extent to
which they are:
 Relevant
 Representative
 Cost‐effective
 Comparable

Objectives..Indicators..Targets
 We also need to be careful not to confuse objectives, indicators and
targets.
 An objective is a statement of what one is trying to achieve – for
example “reducing death from HIV/AIDS”.
 By contrast, a performance indicator is quantified (e.g. “the
percentage of the population which is HIV/AIDS positive”, or “the
number of persons dying annually from HIV/AIDS”).
 A target goes one step further and sets a precise aim to be achieved
by a specific date (e.g. “reducing the percentage of
HIV/AIDS‐positive persons in the population by at least one‐third
by 2020”).

Linking Funding to Outputs
Challenges…Issues!!
 The main focus in PB system is the creation of links between the
quantity of output (i.e. volume of services provided) and the level of
funding.
1. Heterogeneous Outputs:
 For many outputs produced by government, there is a much
stronger link between funding provided and outputs delivered (or
deliverable) than is the case for outcomes.
 However, quite a few government services are not standardized.
They are, rather, heterogeneous outputs. This means that the level
of service provided to different clients, or in different cases, is
deliberately varied so as to address differences in client conditions
or circumstances.

 Police criminal investigations are a classic example – the
amount of effort put in per case, even for the same types of
case (e.g. murder investigations) varies enormously
depending on the circumstances of the case.
 Even in school education, which is quite standardized for the
great majority of students heterogeneity is present when
additional teaching and care activity is devoted to children
suffering an intellectual or physical disability.
 This means that these forms of performance budgeting can
only be applies selectively to the right types of services.

2. Contingency
There is one other type of service for which tight links
between outputs and funding are problematic. This is
contingent capacity outputs, (which are subject to chance)
of which a fire department is a good example.
 The fire department maintains capacity to provide at very
short notice an output (firefighting) for which the demand is
highly unpredictable. It would be unrealistic to seek to build
a very close link between the number of fires attended by the
fire service and the level of funding.
 Fire services cannot therefore be funded on a per‐output
basis, but must instead be funded in such a way as to deliver
a certain level of capacity to fight fires.

3. Quality with Quantity
 There is also the question of potentially linking funding to output quality.
 In funding only for output quantity, one creates incentives for agencies to cut
costs by reducing quality. Including a quality component in funding could, in
principle, resolve this problem. In practice, however, this is not easy, given
the limits to our capacity to measure quality and the consequently highly
imperfect nature of most quality measures.
 In general, the best hope for linking funding to output quality is through
some element of performance bonus funding based on quality measures
(similar to outcome bonuses) – in other words, by adding on to a system in
which the main funding is based on output quantity a small additional
element of quality‐based funding.

Evaluation and Performance Budgeting
 Performance budgeting is often represented as being only about the use of
performance indicators in the budget. This is wrong, because it overlooks the
crucially important role of evaluation.
A Definition of Evaluation
 “The systematic and objective assessment of an ongoing or completed project,
program or policy, its design, implementation and results. The aim is to
determine the relevance and fulfillment of objectives, development efficiency,
effectiveness, impact and sustainability. An evaluation should provide
information that is credible and useful, enabling the incorporation of lessons
learned into the decision– making process of both recipients and donors.
 Evaluation also refers to the process of determining the worth or significance
of an activity, policy or program. An assessment, as systematic and objective as
possible, of a planned, ongoing, or completed development intervention.”
Keith McKay (2007), How to Build M&E Systems to Support Better
Government (World Bank Independent Evaluation Group).

Role of Evaluation in PBB
 Identify components of programs which can potentially be cut: this means
programs which are not cost‐effective and which cannot readily be made
cost‐effective through policy design or management changes.
 Identify savings which can be made by improving the efficiency of service
delivery.
Evaluating Program Effectiveness
 The evaluation of program effectiveness has a particularly important role to
play in those forms of performance budgeting which focus on the allocation of
resources in the government‐wide budget, of which program budgeting is the
most important form. As we have seen, this means in particular that:
 Decisions about expenditure prioritization – where to allocate limited
resources – are informed by good information on program effectiveness,
 Decisions about funding for specific ministries and agencies – and in
particular decisions on their requests for additional resources – are informed
by reliable information on how effectively the ministry or agency has used
funding it has received in past budget.
 Evaluation is crucial in this context because performance indicators are
frequently insufficient in isolation to permit judgments on program or agency
effectiveness.

Pros and cons of PBB
 Limit vs. Target
PBB works with targets and goals. It may set a goal to put computers in 100
hospitals, for instance, instead of setting a limit on how much money can be
spent on computers. While this has its advantages, it also creates difficulties.
For instance, how much money should be spent on computers? What types of
computers are best suited for the hospitals in question? A budget with limits
helps answer these questions. A budget with only targets can be too nebulous,
leading to inaccurate forecasts and over-expenditure.
 Measurement Issues
Another problem with the target system that PBB uses is measurement. Even
if an organized budget can be developed and the project is carried through to
completion, defining completion can pose problems. Some goals can be vague
e.g.-- improving technology in a district hospital. An organization may have
conflicting views on when that goal has been reached, which makes it difficult
to spot an end for the project and a turning point for the budget.

 Cost Analysis
Because PBB is so vague, it does not present a clear cost framework for
organizations to follow. In other words, PBB can create a lot of extra work
for analysts. They have to focus on a target, but also perform separate cost
analysis to set individual prices on the steps involved. This extra cost
analysis is a drain on funds and adds confusion to the budget.
 Flexibility Problems
Flexibility is one of the primary advantages of PBB. But it also opens the
door for broad changes that can make previous cost analyses and budgets
obsolete. PBB places a great deal of strategic power in the hands of public
leaders and programs, but these have a habit of changing. A new director
may be appointed and switch the target to 500 computers in hospitals,
which requires a complete reworking of the budget.

Zero based and performance based budgeting

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