Zero-based Budgeting

Zero-based budgeting is a method of budgeting in which all expenses for each new period must be
justified. Under zero-based budgeting, no reference was made or considered of previous years. The
budget request has to be evaluated thoroughly with its commencement from the zero-base.
Evolution of zero-based budgeting (ZBB)
The Zero-based budgeting concept was advocated in 1924 by British budget authority Edward Hilton
Young. He advocated complete justification of every item requested in a budget. The ZBB concept
became more popular only in 1970s. In 1960s, ZBB was formally initiated in the Department of
Agriculture of the USA. The ZBB as practiced today was developed at Texas Instruments Inc. during
1969 by Peter Pyhrr. The process was first adopted in Georgia. The result of ZBB in Georgia was
mixed. In 1970s, Jimmy Carter was elected as American President amid recession. He vowed to
recover the economy. He ordered for implementation of the ZBB in America. Soon it spread in to
private organisations also. However the results are mixed. Later American President Ronald Regan
dropped the ZBB concept.
Zero-based budgeting in India
In India, the principle of ZBB was initiated in the Department of Science and Technology in 1983. In
1986, the Indian government adopted ZBB as a technique for determining expenditure budget. The
government made it mandatory for all ministries to review their programmes and activities and
prepare their expenditure estimations based on ZBB concept. In seventh five-year plan, the ZBB
system was promoted. However, later not much progress happened in this area.
Features of zero-based budgeting
Zerobase
ZBB works on the principle that every year, the projected expenditure for each project/programme
must be start from zero. It means all budget requests should be considered freshly for every year
with cost-benefit analysis.ZBB never uses the previous years amounts so as to eliminate the past
mistakes.
Focus is on activities/programmes
The focus is on programs or activities instead of functional departments.
Best suited to discretionary costs
ZBB is best suited to discretionary costs, for example, advertising, research development and
training costs.
Decision packages
A unit makes its budget request by preparing decision packages for each activity it undertakes.
Funding decisions are based on activity.
Cost-effective
ZBB helps policy makers to achieve more cost-effective delivery of public services.
Bottom-up approach

ZBB starts from the lowest level activity and then moves upwards.
Accountability
It makes the functionaries accountable for the amount they are responsible for.
ZBB model was formulated to correct certain flaws of traditional budgeting system, which does
notallow authorities to discover optional processes.
Zero-based budgeting procedures
According to Peter Pyhrr, the zero-based budgeting is an approach, not a fixed procedure or a set of
forms to be applied uniformly across all organisations. The mechanics and management approach
has differed significantly among the organisations that have adopted zero-base and the process
must be adapted to fit the specific needs of each user.
Steps to the ZBB approach: Although the specifics differ among organisations, there are 4 steps to
the ZBB approach that must be followed by each organisation:
Identify decision units (DU). Normally different departments are considered as decision units. The
basic criterion should be that it is capable of carrying out different programmes or activities to
achieve one objective.
Analyse each decision unit in a decision package concept. The content and format of the decision
package must provide management with the information it needs to evaluate each decision unit. This
information might include purpose/objective, costs and benefits, performance measures, optional
means of achieving aims and benefits.
Evaluate and rank all decision packages to develop the appropriations request. The ranking process
provides management to allocate its limited resources by making management concentrate on these
questions. How much should we spend and where should we spend it? The decision packages
should be evaluated and ranked as per their level of significance. Some subjectivity also needs to be
used in this method with cost-benefit analysis as some activities may not be quantifiable.
Prepare the detailed operating budgets reflecting those decision packages approved in the budget
appropriation.
Conditions for successful implementation of ZBB
There are a few conditions for successful implementation of ZBB.
Committed Management: The top management should have a participatory role and they must be
committed to implement the ZBB.
Fixed Goals: Goals to be achieved must be fixed. They should not be vague.Identification of Weak
areas: Organisation must identify weak areas to be worked upon.
Trained Staff: ZBB requires a trained staff for its procedure to be implemented properly.

Review: Decision packages must be reviewed periodically.

Brainstorming Sessions: There must be brainstorming sessions at all hierarchical levels to get proper
and timely feedback.
Need for zero-based budgeting
Low priority programs can be eliminated or reduced.
Effectiveness of programmes can be dramatically improved.
Programmes of high priority can obtain increased funding by shifting resources within an agency.
The government need not increase the tax revenue as ZBB can to do a more effective job with
existing revenues.
Benefits of zero-based budgeting
Unbiased: The bias from previous information or datais eliminated.
Higher motivation: ZBB seeks employees to work more cohesively and closely together during the
budget process. This results in high levels of motivation and interest among employees to do their
work efficiently.
Effective Procedures: Zero-based budgeting will generate effective ways and methods to do the
work.
New Ideas: Inzero-based budgeting new technologies, methods and materials are encouraged to
make the organisation more successful.
Efficient Allocation of Resources: By following cost-benefit analysis ZBB will allocate the resources
very efficiently.
Planning Tool: ZBB is a planning tool used in management which helps in identification of wasteful
and redundant items of expenditure.
Limitations of zero-based budgeting
Bureaucratic and Time Consuming: TheZBBapproach takes a lot of time as it is a completely bottomup approach.The process was so bureaucratic and time consuming that the organisations got
discouraged to use it again. Incorrect Assumptions: The ZBB process can be useful only if the
organisation has the time and knowledge to make accurate assumptions. Incorrect assumptions by
not looking at the previous years assumptions will be of little help to the organisation.
Threat felt by Bureaucrats: Bureaucrats feel threat towards ZBB process as it evaluates the
effectiveness of their programs.
Problems of Managers: The ZBB process require trained personnelfully aware of the concept, are
difficult to find, who can carry out analysis of expenditure by applying the evaluative techniques like
cost-benefit analysis, cost-effectiveness analysis etc.

Too Much Paper Work: It is a major factor contributing to the failure of ZBB.ZBB process require too
much of paper work and it was found unmanageable by the organisations concerned.
Organisation Hierarchy: Like traditional budgeting, ZBB was also based on organisational hierarchy.
Organisational hierarchy reinforces functional barriers and fails to focus on the opportunities for
improving business processes.
Plan and Non-plan Expenditure in India: India follows a system of Plan and Non-Plan expenditure.
They should be dealt differently, and it becomes quite difficult to rank them as one.
Conclusion
Though ZBB is a good technique of budgeting, it was not implemented successfully. ZBB does not fit
into organisations with long range objectives. Proper attention, Commitment form management and
trained personnel can better implement the ZBB process.