Zero based budgeting - Zero-Based Budgeting Zero or Hero Introduction For many organizations the thought of rebuilding the company budget from the

Zero based budgeting - Zero-Based Budgeting Zero or...

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Zero-Based Budgeting: Zero or Hero? Introduction For many organizations, the thought of rebuilding the company budget from the ground up can be nightmare- inducing. Wiping the financial slate clean and starting from scratch would be a last resort in a worst-case scenario, never an option to be considered under normal circumstances. Yet starting around 2008, an increasing number of organizations chose to do exactly that. Faced with an economic recession, both public and private corporations began to turn towards an extreme method of budgeting known as “Zero-Based Budgeting,” or ZBB. ZBB is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history. 1 As opposed to traditional budgeting, no item is automatically included in the next budget. 2 In ZBB, budgeters review every program and expenditure at the beginning of each budget cycle and must justify each line item in order to receive funding. Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general, and administrative costs; marketing costs; variable distribution; or cost of goods sold. 3 When successful, ZBB produces radical savings and liberates organizations from entrenched departments and methodologies. 4 When unsuccessful, the costs to an organization can be considerable.
Zero-Based Budgeting: Zero or Hero? 2 Though the private sector uses ZBB, 6 ZBB first rose to prominence in government during the 1970s financial crisis. Faced with mounting public pressure, U.S. President Jimmy Carter promised to balance the federal budget and reform the federal budgeting system using ZBB, which he had used while governor of Georgia. Though initially well received, ZBB proved not only complicated and time consuming, but also ineffectual, 7 as it was Congress and the executive branch that were ultimately responsible for deciding whether to keep or eliminate a program. 8 Additionally, the president’s budget office used a variant of ZBB as agencies were asked to rank their programs within funding limits. This forced the agencies to assign priorities and identify possible reductions. However, this meant that rather than starting from a true zero base as ZBB would suggest, the agencies would start from a “priority base” (e.g., 80-85% of the current year). 9 President Reagan abandoned the system after his election in 1980. 10 Since then, ZBB’s use in both the public and private sectors has been limited due to its high level of complexity and large requisite investment that can hinder its execution. Explaining Rising Popularity ZBB has recently experienced a resurgence of interest in both the public and private sectors. In the public sector, this stems largely from contemporary fiscal constraints precipitated by the 2008 recession. Facing budget cuts and increased public scrutiny, government agencies have been using alternative budgeting methods such as ZBB instead of more traditional budgeting methods such as line-item and incremental budgeting.

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