ZERO Based Budgeting

Contents
Definitions
Budget and types
Zero base Budgeting
Historical development
Steps Involved
1. Decision Units
2. Decision Package
3. Decision Making
ZBB Approach
Advantages
Limitations
Conclusion
Alternatives to ZBB
PPBS
 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
 Traditional
Budget
Revenue Budget Capital
Budget
Income budget Expenditure Budget
Hospital service Employee cost Investment in long
charges i.e. Beds, Management term assets.
OTs, OPD, Medical Balance from
Diagnostics, Nursing revenue budget
Consultations Para medical Loans to finance
Auxiliary services Engineering capital projects
i.e. Blood bank, Unskilled Disinvestment of
Ambulance, Admin and assets
Canteen, accounts
Telephone, Parking, Materials &
Chemist, Laundry supplies
and linen Dietary services
Miscellaneous i.e. Maintenance
Rent, sale of scrap Other hosp
Investments i.e. expenses
FDs, Dividends Office expenses
Donations Interest
 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.
 Historical Development - ZBB
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- 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.
 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.
 Defining a decision unit
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
PHCs.
A specific manager should be clearly responsible for the operation

of the program.
Identify and describe a particular activity.
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
 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
 ZBB Approach
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.
 ZBB Approach
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

Functio Function Function Function C4

n D3 Future
A B C D B2 Budget
C4 A3
A3 D3
B2 C3
A2 D2 A2
B1 C2
A1 D1 D2 Order
C1
of
D1
priority
C2

C1
Minimu
B1 m Needs
A1
 Vs.
Budgeting
Basic Traditional Budgeting
Difference
Emphasis It is accounting oriented;
emphasis on How Much oriented; emphasis on
Approach It is monitoring towards
the expenditures
Focus To study the changes in
the expenditures
Communicati It operates only Vertical
on communication
Method It is based on the
extrapolation i.e. from the
yester figures future
projections are carried out
Zero Base
Zero Base
Budgeting
It is more decision
Why
It is towards the
achievement of
objectives
To study the cost
benefit analysis
It operates in both
directions horizontally
and vertically
Its decision package is
totally
based on the cost
benefit analysis.
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.
To Conclude
What Are The Alternatives To ZBB?
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 communitys 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.
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.
 PPBS
Is another useful management technique
Involves decision making since it includes
Selecting objectives
Strategies
Policies
Programs and procedures
For e.g. setting up a hospital involves:
Setting goal
Planning
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
Programmin
Identifying likely problems g
Total time for completion of project

Financing and annual reviewing exercise Budgeting

Work up of a time table Scheduling

 References
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.
Thank you