Zero-Based Budgeting

Zero-Based Budgeting (or ZBB for short) is an alternative approach to resource planning, decision-making and financial management. Rather than starting with estimates for the current financial year, as with incremental budgeting, the starting point for ZBB is nil or zero. For each product or service, the total estimated costs should be fully offset by projected income. In the context of ODL institutions, this means that estimated expenditure for each course or programme must be balanced out by income from student fees, government grants and subsidies, or other sources.

With the ZBB model, all spending requests must be costed and justified in detail. These are then assessed against requests from other departments before a decision is taken on which should go ahead.

ZBB operates as follows:

STEP 1: Developing Decision Packages
A decision package is a document that explains a proposed activity, its goals and objectives, what benefits are expected, how performance will be measured and all costs that will be incurred. In addition, a decision package should outline what alternative courses of action have been considered and why these were rejected.

STEP 2: Ranking Decision Packages in order of Priority
Before each manager submits the decision packages on behalf of her/his department, they must first be ranked in order of priority. Once all the decision packages have been submitted to a central decision-making body, they are then ranked in terms of the priorities of the institution as a whole. The costings in each decision package are also reviewed to ensure that they are not excessive or unrealistic.

STEP 3: Allocating Funds
Where activities are not self-financing and require a contribution from central funds, then whatever resources are available can be allocated to the various activities on the basis of their ranking. When this central fund has been exhausted, then no further decision packages are approved.

Activity

This exercise may be carried out individually, in pairs or in small groups. Draw a line down the middle of a blank sheet of paper to create two columns; At the top of the left hand column, write the word 'Advantages'; At the top of the right hand column, write the word 'Disadvantages' Brainstorm all the advantages and disadvantages you can see for Zero-Based Budgeting. Feedback: Advantages The chief advantage of the ZBB approach is that it combines planning and budgeting into a single process which is focused on a comprehensive analysis of objectives, needs and priorities. ZBB can detect where a budget has been inflated and it thus helps to eliminate waste. It also drives managers to find more cost-effective ways to carry out activities in their departments. When subordinate staff are involved in the process, it creates a greater sense of ownership of and responsibility for the decision-making process. Disadvantages Perhaps the biggest drawback to ZBB is the amount of work involved in preparing and prioritising decision packages. This process can be extremely time-consuming and exhausting. In effect, ZBB demands a full Activity-Based Cost analysis to be carried out for each course or programme (Levels 2 or 3 in a hierarchical taxonomy of cost objects). Because of its focus on programme or project spending, ZBB may also lead to micro-management at the expense of things that really matter. In addition, since bidding for central funds and ranking on the scale of institutional priorities is essentially a competitive process, ZBB can increase tension between managers from different departments. Such tension can filter down to subordinate staff leading to inter-departmental rivalries. In particular, production departments tend to benefit at the expense of service units, such as Research and Development, since the outputs of the former are more concrete and have the potential to generate income.