Traditional budgeting starts with previous year expenditure level as a base and then discussion is focused .on certain “additions” or “cuts” to be made in the previous year spending. The top management finally gives its approval after hearing the arguments for and against the “additions and “cuts”. In Zero Based Budgeting (ZBB) reference, is not made to previous level of spending. A convincing case is made for each decision unit to justify the budget allotment for that unit during that period. Zero Based Budgeting differs from traditional budgeting on many points and following tire a few points of difference between the two systems of budgeting:
Traditional Budgeting Vs Zero Based Budgeting
- Traditional budgeting is accounting-oriented and mainly lays its emphasis in previous year expenditure. Zero Based Budgeting is decision-oriented and makes all projects and programmes old and new to complete for scarce resources.
- In traditional budgeting, past expenditure forms the basis for future demand for inflation, and new programmes. In Zero Based Budgeting, a decision unit is broken down into decision packages, which are ranked on priority basis.
- In traditional budgeting deliberate manipulation of budget proposals is possible. But in Zero Based Budgeting, a rational analysis of budget proposals is made. Management approves only those carefully devised result-oriented decisions packages.
- In traditional budgeting, the top management takes decisions as regards the amount to be spent on a decision unit. But in Zero Based Budgeting this responsibility is shifted to the manager of a decision unit.
- Traditional budgeting Makes a routine approach and is not clear and distinctive. Zero Based Budgeting makes each decision on budget proposal very distinctive and clear. It is a straight-forward approach and highlights priority projects distinctively.
Features of Zero-Base Budgeting
The essential features of Zero-Base Budget are as follows:
- The budget allotment to any decision unit should be first justified by the manager of that decision uses. He should justify his request without making reference, to previous level pending in his decision unit.
- Activities are identified a decision-packages and then the latter are ranked in order of priority.
- Decision-packages are evaluated by system analysis linking them with clearly laid down corporate objectives.
- A frank relationship exists between supervisors, and subordinates.
- Available resources are directed towards alternatives in order of priority to ensure optimum results.
Advantages of Zero-Base Budgeting
Zero-base budgeting has proved to be useful in many companies around the globe in improving management development, fostering innovations for better results and resolving problems in decision-making. As a tool of management planning and control, Zero-base budgeting may be said to offer several advantages:
- It provides the organization with a systematic way to evaluate operations and programmes of activity, and allows management to allocate resour66s according to the priority of programmes.
- It ensures thorough examination of every function. Managers are required to evaluate the need for every programme, and to consider different levels of effort and alternative ways of performing the operations.
- It enables departmental budgets to be approved on the basis of. Cost-benefit comparison rather than be open to any arbitrary cuts or increases in budget estimates.
- If decision-packages are linked in order of priority, subsequent budgets cycles do not have to be based on a complete recycling of budget inputs.
- If available resources vary form the budgeted estimates during the but year, decision-packages can be reduced or expanded on the basis of priority ranking of the packages.
- Long-range goals and plan can be linked with the annual budgets through the zero-base budget. Not out does it facilitate quantification of costs and benefits of contemplated decisions, it also enables managers to communicate problems and opportunities to the higher management.
- The performance of line managers can be judged against their commitments like terms of the approved decision-packages and their budgets.
Limitations of Zero-Base Budgeting
The limitations of Zero-base budgeting, which arise largely due to certain operational problems, are as follows:
- Implementation problems. Successful implementation of zero-base budgeting may require wholehearted support from the top management, which may not readily available owing to fear and problems in the minds of lop management. The concerned managers should continue in the same decision units. If they are transferred frequently to other departments, it may lead to waste of time and resources in training and developing new managers.
- Formulation problems. Considerable problems may arise while formulating decision-packages. For example, problem may arise in the fixation of minimum level of effort. Managers may not like to fix the minimum level below the current levels. Similarly problems may arise in formulating meaningful performance evaluation measures.
- Ranking problems. Problems may arise in ranking of decision packages. Generally in managers may like to continue their favorite projects for the reasons best known to them. Ranking may also become difficult when there are a large-number old decision-packages, particularly in a multi-product manufacturing firm.
Credit: Financial Management-CU