Question 3
Zero-Based Budgeting
The budgeting method known as Zero-Based Budgeting (ZBB) is very different from
conventional incremental budgeting. Every budget cycle in ZBB begins with a new
assessment of all programs and activities, and each budget item—regardless of
whether it was included in the prior budget or not—must be justified entirely (Holzer
& Holzer, 2019). ZBB's core tenet is to allocate resources according to the benefits
and actual needs of each activity, as opposed to just making a percentage
adjustment to the previous budget.
Managers must rank and prioritize each department's functions and activities after
conducting a thorough analysis of them as part of ZBB. Because it makes managers
reassess the need and viability of each program, this process promotes
accountability and efficiency. Although ZBB is thought to be more time-consuming
and rigorous than incremental budgeting, supporters contend that ZBB improves
resource allocation and cost control (Finkler, Purtell, Calabrese, & Smith, 2018).
Incremental Budgeting
On the other hand, incremental budgeting is a more conventional and popular
strategy. Based on historical spending, budgetary adjustments are made, with the
understanding that the current budget will only marginally differ from the previous
one. Each department's or program's budget is normally increased or decreased by
a specific percentage during this process, which frequently reflects organizational
growth or inflation rates (Holzer & Holzer, 2019). Because incremental budgeting is
typically easier to use and takes less time than ZBB, it is the method of choice for
businesses that value efficiency.
Incremental budgeting has been criticized for possibly creating inefficiencies by
continuing to fund initiatives or projects that are neither required nor effective.
Opponents contend that this method does not promote closely examining every
expense, which could lead to the distribution of funds to less effective regions
(Finkler et al., 2018).
.
Zero-Based Budgeting Incremental Budgeting (IB)
(ZBB)
Advantages - Encourages cost efficiency - Simple and easy to prepare and
and accountability understand
- Eliminates wasteful or - Maintains stability and continuity
obsolete spending
- Avoids conflicts and disruptions
- Aligns spending with
- Preserves organizational culture
strategic goals and priorities
and values
- Allows for flexibility and
innovation
Disadvantage - Time-consuming and - Encourages complacency and
s complex to implement and inertia
review
- Fails to address changing needs
- Requires extensive data or opportunities
and analysis
- Perpetuates inefficiencies or
- May demotivate staff or errors
reduce morale
- May create budgetary slack or
- May overlook essential or padding
beneficial spending
Using ZBB for large or discretionary expenses that significantly affect the
organization's performance or strategy, like new projects, programs, or initiatives, is
one way to combine the two approaches. This would guarantee that these costs are
assessed according to their costs and benefits and that they are in line with the
organization's goals and priorities. IB could be used to make minor, non-
discretionary, relatively fixed or routine expense adjustments for things like
maintenance, utilities, and salaries in light of growth, inflation, and other
considerations. In addition to preserving continuity and stability, this would save time
and money.
An illustration of this hybrid strategy is the multinational consumer goods corporation
Unilever, which implemented ZBB in 2016 in an effort to cut expenses and boost
profitability. ZBB was used by Unilever for its marketing, advertising, and promotional
costs, which made up roughly 15% of its overall expenditures. Every brand manager
had to start from scratch and defend every expense with an estimated return on
investment. This enhanced the efficacy of its marketing campaigns and led to a thirty
percent decrease in these costs. In addition, Unilever used IB for its manufacturing,
distribution, and administrative costs, which made up roughly 85% of its overall
expenditures. It modified these costs to account for changes in volume, inflation, and
currency fluctuations. This kept up its standards of quality and operational efficiency.
The possible combinations of ZBB and IB can further be illustrated by the following
elements:
- The organization's size and complexity: Due to their greater potential for cost
savings and innovation, larger or more complex organizations may profit more
from ZBB. IB may be more appropriate for smaller, more straightforward
organizations because they have less room for development or change.
- The type and frequency of the expenses: Since they need more investigation
and explanation, expenses that are variable, uncertain, or discretionary might
be more appropriate for ZBB. Fixed, predictable, or required expenses might
be more appropriate for IB since they need less tweaking or reviewing.
- Data availability and quality: ZBB needs pertinent and trustworthy data to aid
in decision-making. IB still needs timely and accurate information, but it
requires less data overall. The company needs to make sure that it has
sufficient procedures and systems in place for gathering, storing, and
analyzing data using these two approaches.
- Organizational culture and values: ZBB could promote an innovative,
accountable, and cost-conscious culture. IB might promote a trusting,
consistent, and stable culture. It is imperative for the organization to ascertain
if the selected method or methods align with its culture and values.
In conclusion, by combining ZBB and IB, an organization can achieve effective,
efficient and economical budget processes that balance cost savings with value
creation and align spending with strategic goals and priorities.
Reference
Hope, J. & Fraser, R. (2003). Who needs budgets? Harvard Business Review, 81(2),
108-115.
Pyhrr, P.A. (1973). Zero-base budgeting: A practical management tool for evaluating
expenses. John Wiley & Sons.
Unilever (2017). Annual report and accounts 2016. Retrieved from
https://www.unilever.com/Images/unilever-annual-report-and-accounts-
2016_tcm244-498880_en.pdf
Finkler, S. A., Purtell, R. M., Calabrese, T. D., & Smith, D. L. (2018). Financial
Management for Public, Health, and Not-for-Profit Organizations. CQ Press.
Holzer, M., & Holzer, P. (2019). Zero-Based Budgeting: Origins, Development, and
Current Practice. In The Palgrave Handbook of Public Administration and
Management in Europe (pp. 501-520). Palgrave Macmillan.
