Zero Based Budgeting

Zero Based Budgeting (ZGB) is a budgeting method in which all expenditures for each new period must be justified. The ZBB method begins with zero bases, where all functions and within an organisation are examined for their demands and service costs. Everything is started from scratch where the planning and budgeting is done afresh without any base. Budgets are then based upon what is required for the next year, whether another budget is higher or lower than that of the preceding year.

The zero-based budgeting concept was advocated in 1924 by British budget authority Edward Hilton Young. In India, the principle of ZBB was initiated in the department of science and technology in 1983. In 1986, the Indian Government adopted the ZBB technique for determining expenditure budget.

Benefits of Zero-based budgeting:

Unbiased: The bias from previous information or details 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 effectively.

Effective Procedures: Zero-based budgeting will generate effective ways and methods to do the work.

New Ideas: In zero-based budgeting new technologies, methods and materials are encouraged to make the organization 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 that helps in the identification of wasteful and redundant items of expenditure.

Limitation of Zero-based budgeting:

Bureaucratic and Time-Consuming: ZBB approach takes a lot of time as it is a completely bottom-up approach. The process was so bureaucratic and time-consuming that the organizations got discouraged to use it again.

Incorrect Assumptions: The ZBB process can be useful only if the organization 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 organization.

The threat felt by Bureaucrats: Bureaucrats feel threats towards the ZBB process as it elevates the effectiveness of their programs.

Too Much Paper Work: It is a major factor contributing to the failure of ZBB. ZBB process requires too much paperwork and it is found unmanageable by the organizations concerned.

Organization Hierarchy: Like traditional budgeting, ZBB was also based on organizational hierarchy. Organizational hierarchy reinforces functional barriers and fails to focus on the opportunities for improving business process

Plan and non-plan expenditure in India: India follows a system of plan and non-plan expenditure. They should be dealt with differently and it becomes quite difficult to rank as one.