Zero-Based Budgeting in PSUs (ZBB)
When V.P.Sing was the finance minister of India, Zero-Based Budgeting was introduced in the central government departments in 1986-87. The problem faced by the central government at that time was mounting non-plan expenditure and decline in public savings. Defence expenditure, interest payments and subsidies formed a major portion of non-plan expenditure. Moreover,public – sector undertakings were confronting the problems of inefficiency in resource allocation, high incremental capital-output ration, and mounting losses. Thus, in order to reduce wasteful expenditure, the prevailing environment at that time lent a strong support for the introduction of ZBB in India.
Zero-based budgeting is an alternative budgeting system that starts with zero base. It is a newly invented budget technique where executives are required to start at zero budget level every year and justify all the costs of the existing function in comparison with the present and future functions. It attempts to review and defined all functions and costs every year.
According to CIMA,London, Zero-based budgeting as ‘a method of budgeting whereby all activities are re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exit and is at zero cost. Increments of cost are compared with increments of benefits culminating in the planned maximum benefit given the budgeted cost’.
Features of zero based budgeting
- The focus is on integration of an organisations’s goals with the departmental and individual goals.
- Every activity or item, for which budget is being prepared, need to be justified in terms of its contribution towards achievement of goals, irrespective of the past.
- The budgets are prepared from e scratch on the basis of justification and cost-benefit analysis.
Advantages of Zero-based budgeting
- It provides a basic for evaluating decision packages on the basis of cost-benefit considerations.
- It reduces inefficiency and achieves high level of effectiveness.
- In government sector,it is helpful in identifying and improving the services.
- It can be applied to cost-reduction programs.
- It ensures thorough examination of every function or activity.
- Scarce resources can be utilized effectively.
- ZBB integrates planning, budgeting and control into a single process.
Disadvantages of Zero-based budgeting
- It is not suitable for all the activities in an organisation.
- It is not advantageous to apply in R and D activities where it is difficult to define the objectives and goals.
- It is not a panacea for curing all management ills.
- It increases more paper work.
- It takes more time and effort.
- managers often justify current level as minimum level of funding.
- Human problem- There will be resistance to change on the part of managers.