Zero Base Budgeting (ZBB) – Difference Between Traditional
Budgeting and Zero Base Budgeting
What is
Zero Base Budgeting?
Zero Base Budgeting,
often called ZBB, is a modern and unique way of planning budgets. It is
very different from the traditional budgeting system.
In traditional budgeting,
we look at last year's budget, make small changes (add or reduce), and create a
new budget. But in Zero Base Budgeting, we start from zero every
time. That’s why it's called “Zero Base.” Every expense must be justified
from the beginning, as if the budget is being prepared for the very first
time.
CIMA Definition:
“A method of budgeting where all activities are re-evaluated every time a
budget is set. Activities are ranked and selected based on available funds.”
Key Concept
In Zero Base Budgeting:
- No past data is assumed.
- Managers must explain and justify
every expense.
- The focus is on why the money
should be spent, not just how much.
- Each activity is packed into a “decision
package”, which is then analyzed and ranked.
Steps in
Zero Base Budgeting
1. Create
Decision Packages
o These
are small units or parts of a programme.
o Each
package explains the purpose, cost, benefits, and alternatives.
2. Rank
the Decision Packages: All packages are ranked based on
importance or usefulness.
3. Allocate
Resources: Funds are given based on the ranking. High-priority
packages get funds first.
Important
Features of ZBB
- Focus is on “why” the money is
needed, not just “how much.”
- Helps in choosing the best option
for spending.
- Connects each department’s goals to
the organisation’s main objectives.
- Budget changes can be made easily
during the year.
- Involves all levels of managers
in the budget process.
Difference
Between Traditional Budgeting and Zero Base Budgeting
|
Traditional
Budgeting
|
Zero
Base Budgeting
|
|
Based
on last year’s budget
|
Starts
from zero each year
|
|
Focuses
on past spending
|
Focuses
on current needs
|
|
Manager
requests more by adding to last year’s budget
|
Manager
justifies every rupee requested
|
|
Less
detailed
|
More
detailed and decision-based
|
|
Top
management decides funding
|
Responsibility
given to unit managers
|
Advantages
of Zero Base Budgeting
1. Improves
Efficiency: Forces managers to think carefully about spending.
2. Better
Participation: Involves all managers, so everyone takes
ownership.
3. Flexible
and Fresh Start: New budget every year helps remove
wasteful spending.
4. Cost
Reduction: Helps find cheaper and better ways to do things.
5. Better
Resource Allocation: Resources are given to the most
important programmes.
6. Helps
in Planning: Encourages proper analysis,
documentation, and financial planning.
Criticisms
or Limitations of ZBB
1. Difficult
to Identify Packages: Breaking programmes into small decision
units is tough.
2. Needs
Training: Managers must learn how to prepare ZBB, which takes
time.
3. Expensive
and Time-Consuming: Large organisations may find it costly
and require more effort.
4. Focus
on Short Term: May ignore long-term goals while
focusing on immediate benefits.
5. Too
Much Paperwork: Many documents are needed for each
decision package.
6. Not
Suitable for All Activities: Hard to apply ZBB in areas like
research, where results can't be measured easily.
Conclusion
Zero Base Budgeting is a
powerful budgeting technique that promotes accountability, efficiency, and
better use of resources. Unlike traditional methods, it doesn’t take
anything for granted and asks every department to justify their expenses from
scratch. Though it has some limitations, ZBB is useful for making smart
financial decisions and cutting unnecessary costs.
Disclaimer: All the Information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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