Traditionally, when we make budgets ; the income and expenditure of the previous year is eaxmined. Some adjustments providing for inflation or other expected events are made and the new budget emerges. This is true whether it is a family budget or that of an organization or country. However, under Zero based budgeting, the new budget starts with zero for the various projects and activities. All expenditure, for each of the activity, is required to be calculated and the need for the expenditure justified. Zero-based budgeting puts the onus on managers to justify expenses. This is in contrast to the traditional budgeting wherein only new expenditures are required to be justified ( not the old, recurring expenditure). In recent years, many Fortune 500 and private equity companies have adopted this budgeting technique.
Zero-based budgeting (ZBB) was developed and implemented by Peter Phyrr. former Texas Instruments account manager in his company in the 1960s. It is a methodology that helps to align company spending with strategic goals. It requires you to verify & satisfy that all components of the annual budget are cost-effective, relevant, and drive improved savings. Every function within an organization is analyzed for its needs and costs. The budgets are then built around what is needed for the upcoming period. Zero-based budgeting helps managers to achieve lower costs in the company.
Under ZBB, Individual unit's objectives are aligned with the corporate objectives. Instant adjustments in the budget are possible if required. All the levels of the organization participate in the process of decision making. The benefits of ZBB include focused operations, lower costs, budget flexibility, and strategic execution. It helps lower costs by avoiding blanket increases or decreases to a previous period's budget. As for example, Instead of blindly increasing the budget by a certain percentage and masking the cost increase, the company can identify alternative solutions like deciding to make a part inhouse or buy the part from the external supplier for its end products, based on the comparive cost involved.
However, ZBB implementation is a time-consuming process that takes much longer than traditional, cost-based budgeting. Therefore, the costs of the process itself in terms of resources, time and effort must be weighed against the savings expected on its implementation. Further, you also dependent on the cooperation and efficacy of other departments which may not be able to adequately calculate/ measure their needs for the entire year. ZBB tends to give priority to areas that achieve direct revenues or production, since their contribution can be more easily justified unlike departments such as service or Research & Development. This could end up compromising the 'important' matters for the 'urgent' matters, with adverse implications in the long run .
Zero-based budgeting (ZBB) was developed and implemented by Peter Phyrr. former Texas Instruments account manager in his company in the 1960s. It is a methodology that helps to align company spending with strategic goals. It requires you to verify & satisfy that all components of the annual budget are cost-effective, relevant, and drive improved savings. Every function within an organization is analyzed for its needs and costs. The budgets are then built around what is needed for the upcoming period. Zero-based budgeting helps managers to achieve lower costs in the company.
Under ZBB, Individual unit's objectives are aligned with the corporate objectives. Instant adjustments in the budget are possible if required. All the levels of the organization participate in the process of decision making. The benefits of ZBB include focused operations, lower costs, budget flexibility, and strategic execution. It helps lower costs by avoiding blanket increases or decreases to a previous period's budget. As for example, Instead of blindly increasing the budget by a certain percentage and masking the cost increase, the company can identify alternative solutions like deciding to make a part inhouse or buy the part from the external supplier for its end products, based on the comparive cost involved.
However, ZBB implementation is a time-consuming process that takes much longer than traditional, cost-based budgeting. Therefore, the costs of the process itself in terms of resources, time and effort must be weighed against the savings expected on its implementation. Further, you also dependent on the cooperation and efficacy of other departments which may not be able to adequately calculate/ measure their needs for the entire year. ZBB tends to give priority to areas that achieve direct revenues or production, since their contribution can be more easily justified unlike departments such as service or Research & Development. This could end up compromising the 'important' matters for the 'urgent' matters, with adverse implications in the long run .
In conclusion, it is to be stated that ZBB has advantages as also limitations. It is a technique used predominantly by companies, but can be used by individuals and families as well. The benefits have to be weighed by organizations to arrive at a suitable decision on implementation appropriate to the company. In India ZBB was first implemented in the Department of Science and Technology in the year 1983. GOI had introduced the concept in the state of Manipur. ZBB was promoted during the Seventh Five-Year Plan. The government had made it mandatory for all ministries to review their programs and activities and prepare expenditure estimates based on the ZBB concept. However, presently it has limited application in the country.
I had heard about zero based budgeting. But I didn't so much in detail.
ReplyDeleteThanks a lot for reading and responding.
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