Zero Base Budgeting may be defined a planning and budgeting process which requires each manager to justify his entire budget in detail from scratch (hence zero base). Each manager justifies why he should spend any money at all. The approach followed Zero Base Budgeting requires that all activities be identified as decision packages which will be evaluated by a systematic analysis ranked in order of importance.
Zero Base Budgeting and Incremental Budgeting
— In case of Zero Base Budgeting, all figures are developed with zero as the base, however; in case of incremental budgeting, the current year’s budget is taken as the base for the next year’s budget.
— The process of preparation of a Zero Base Budget is a costly and complicated process as compared to incremental budgeting, and is suitable mostly for big organisations. However, it should be noted that though preparation of an Incremental Budget is much easier comparatively, it is not as effective as ZBB because past inefficiencies are not accounted for in an incremental budget.
Main features of Zero Base Budgeting:
— All proposals are considered totally afresh.
— All amounts are to be justified.
— A cost benefit analysis of each programme is undertaken.
— The stress is not on “how much” but on “why”.
— Departmental objectives are linked to corporate goals.
Merits of Zero Base Budgeting:
• Effective allocation of resources.
• Identification of ineffective units.
• Increase in accountability
• Cost behaviour analysis.
• Adds a psychological push to reduce expenditure.
Demerits of Zero Base Budgeting:
• Increase in paperwork and cost of budget preparation.
• Danger of emphasising on short term goals instead of long term goals.
• Proper training and education is required.
• Not easy to rank decision packages, hence giving rise to conflicts.
It should be noted that the merits outweigh the demerits, and more and more organisations these days are following the Zero Base Budgeting approach. This approach has also been implemented time and again by the government of several countries, including India.
-----
No comments:
Post a Comment