A Critical Analysis of the Zero-Based Budgeting

Abstract

Zero-based budgeting is a budgeting technique to prepare completely new budget from zero based with proper analysis. Nowadays the Zero-based budgeting technique is very popular among the business organizations to sustain from increasing business uncertainties, economic crisis and recession. The main features of this technique are high employees’ involvement and removal of inefficient activities from the decision units. On the other hand, organization are struggling in the Zero-based budgeting technique implementation process due to less flexibility, more expensive, time consuming, and lack of expertise. Anyhow, as a conclusion, it is situational budgeting technique is having more unique advantages while having significant numbers of limitations.

Full text

Page 1 of 6
Managing Financial Performance, University of Wolverhampton Business School, January 2019
A CRITICAL ANALYSIS OF THE ZERO-BASED BUDGETING
Subasgar Kumareswaran
University of Wolverhampton Business School; e-mail: S.Kumareswaran@wlv.ac.uk
1. INTRODUCTION
The budget is a financial plan for upcoming period based on forecasting of incomes and
expenditures. Atrill and McLaney (2009) reveal that budget should be set it out in details of the
short-term plans and targets to support to achieve the strategic objective of an organization. In
addition, it should contain all the main features such as policies, data, documentations, and period
which can give clear idea to managers to realize and examine in terms of what they have done and
what they could do (Dyson, 2010). That is why budget preparation is a crucial process in firms
especially in the public sector due to difficulty of defining the objectives in quantitative ways
(Acca, 2018).
1.1 Types of budgets and budgeting methods
There are number of budgets such as master, functional, fixed, flexible, long-term, short-term,
basic, and current budget which can be categorized based on coverage, capacity, period, and
conditions (Shim and Siegel, 2005; Tulsian and Tulsian, 2012). Here, the coverage based
functional budget and master budget are commonly used among the organizations. The functional
budget is associated with individual functions or inter-departmental in an organization for an
example sale budget, production budget, and direct labour budget (Tulsian and Tulsian, 2012). The
master budget is a consolidated summary of various separate budgets which are related to
functional budgets (Shim and Siegel, 2005). On the other hand, there are number of budgeting
techniques have evolved such as top-down, bottom-up, rolling, zero-based, activity-based,
incremental, and feed-forward control budgeting (Ryan, 2017).

Page 2 of 6
Managing Financial Performance, University of Wolverhampton Business School, January 2019
2. ZERO-BASED BUDGETING
The Zero-based budgeting (ZBB) is a budgeting technique which was introduced long time ago;
but it has recently begun to popular among the organizations in term of budget preparation. In
addition, the Zero-based budgeting term was used by Peter F. Drucker in 1960s (Dropkin, Halpin
and Touche, 2007). In the ZBB technique, nothing to continue from the last year budget and the
budgeting process starts as completely new from zero based. It is works from bottom up with
individual revenue, expense, asset, and liability (Nelson, 2008). Furthermore, ZBB encourages
managers to cut-off unwanted costs and activities by asking questions such as necessity of activity,
need to ceases the activity, level of provision adequate, any other way of carrying-out, activity
cost, and benefits at least match the costs (Acca, 2018). Therefore, every department functions
should be reviewed critically from zero based with proper evidences to get approval from top
management. However, Lalli (2012) argues that ZBB is not a budgeting technique but it is a
management approach which helps to decision making process by top management.
2.1 Stages in ZBB process
The stages of ZBB can be differed among the organizations based on their uniqueness, but
literatures reveal that there are mainly basic five steps are in ZBB process such as identifying the
decision units, making the decision packages, ranking, allocating resources, and controlling as
illustrated as in Figure 1 (Acca, 2018; Prasath, 2017; Ryu, 2014; Schmidt and Rieck, 2000).
Figure 1: ZBB process steps
Identifying the decision units
Making decision packages
Ranking
Allocating resources
Controlling

Page 3 of 6
Managing Financial Performance, University of Wolverhampton Business School, January 2019
The initial step is identifying the decision unit which can have one or more independent activities.
Here, organization can have many decision units such as sale department, production department,
and material purchasing department. In this step, department managers should identify, evaluate,
and justify the expenditure in the budget from zero based (Prasath, 2017). The second step of ZBB
process is making decision packages which must align with organization’s objectives (Acca,
2018). Here, goals, functions, expenditure, benefits, and funds are defined for each identified
decision units by dividing into smaller decision packages (Schmidt and Rieck, 2000). As a third
step, decision packages will be ranked within the decision units based on importance and priority
of the decision packages. Based on this ranking, fund and resources will be allocated with concept
of optimum utilization. Finally, as a last step of ZBB preparation process, controlling and
monitoring will be done by evaluating the performance and outputs (Prasath, 2017).
2.2 Advantages of ZBB
There are number of advantages in ZBB while literatures argue its limitations in terms of cost and
time. Anyhow, ZBB is bottom-up process which increases the employee’s involvement at all level
(Nelson, 2008). Therefore, it can help to organizational cultural change at all level of employees
to align with organizational objectives. In addition, ZBB can identify the inefficient activities in
the decision units and remove from the future budget (Lalli, 2012). Therefore, it encourages
decision units to create SMART activities which can be easily approved by top management.
According to Acca (2018), ZBB responds to economic and business environmental changes from
last year to this year. Therefore, it is more suitable to implement when the country in economic
crisis and recession. Finally, ZZB is not repeating bad budgeting decision of past years and overall
result in more efficient allocation of resources (Acca, 2018; Nelson, 2008).
2.3 Limitation of ZBB
ZBB has significant numbers of disadvantages and limitations in terms of flexibility, cost, and
time. The main limitation of this budgeting technique is more rigid which lead to unable to react
in uncertainty situation in terms of business opportunities and threats. Acca (2018) reveals that the
decision unit’s managers should have skills and expertise in constructing decision packages.
Therefore, they need proper training which leads to extra cost and time. In addition, need high
manpower requirement in this budgeting process due to increase of paper work and preparing the

Page 4 of 6
Managing Financial Performance, University of Wolverhampton Business School, January 2019
decision packages from the zero based (Shim and Siegel, 2005). It can be more expensive and
cannot tolerate by small organizations. In the ranking process of ZBB, top management is mainly
focusing in quantitative basis but some activities can give more benefit and measurable in
qualitative; this process can demotivate the decision unit’s managers (Acca, 2018; Lalli, 2012).
2.4 Comparison of budgeting techniques
There are huge numbers of budgeting techniques are in use such as zero-based budgeting,
incremental budgeting, activity-based budgeting, rolling budgeting, traditional budgeting, top-
down/ bottom-up budgeting and so on. However, Table 1 illustrates the comparison among the
main three budgeting techniques;
Table 1: Comparison of budgeting techniques
Basic
differences
Zero-based
budgeting (ZBB)
Incremental
budgeting (IB)
Activity-based
budgeting (ABB)
Basis of
preparation
Current year budget
is prepared as
completely new
without considering
last year’s budget.
Current year budget is
prepared by making
changes in past year’s
budget.
Current year budget is
prepared after considering
cost drivers and not
consider last year’s
budget
Objectives
Clear objectives
with critically
evaluated
expenditure
Not clear objective
with unrelated
expenditure
Clear objectives with
pattern of analysis of
expenditure
Analysis level
None to superficial
In-depth and
comprehensive
In-depth and
comprehensive
Involvement
Top management
All level of employees
All level of employees
Preparation time
Less
high
high
Time span
Short-range
Short-range
Short-range
Staff
requirements
Minimal
Expensive
Expensive
Information
Minimal enough
Need more information
Need more information
Skills/ expertise
Less
high
high
Resource
allocation
After adjusting the
inflation factor
based on last year
After justifying the
expenses based on
decision packages
After justifying the cost
drivers

Page 5 of 6
Managing Financial Performance, University of Wolverhampton Business School, January 2019
3. CONCLUSION
Zero-based budgeting is a budgeting technique to prepare completely new budget from zero based
with proper analysis. Nowadays the Zero-based budgeting technique is very popular among the
business organizations to sustain from increasing business uncertainties, economic crisis and
recession. The main features of this technique are high employees’ involvement and removal of
inefficient activities from the decision units. On the other hand, organization are struggling in the
Zero-based budgeting technique implementation process due to less flexibility, more expensive,
time consuming, and lack of expertise. Anyhow, as a conclusion, it is situational budgeting
technique is having more unique advantages while having significant numbers of limitations.
REFERENCES
ACCA (2018). Comparing budgeting techniques. [online] Accaglobal. Available at:
<https://www.accaglobal.com/lk/en/student/exam-support-resources/fundamentals-exams-study-
resources/f5/technical-articles/comparing-budgeting-techniques.html> [Accessed 27 Nov. 2018].
Atrill, P. and McLaney, E. (2009). Management accounting for decision makers. 6th ed. Harlow:
Pearson Education Limited.
Dropkin, M., Halpin, J. and Touche, B. (2007). The Budget-Building Book for Nonprofits: A Step-
by-Step Guide for Managers and Boards. 2nd ed. Hoboken: John Wiley & Sons.
Dyson, J. (2010). Accounting for non-accounting students. 8th ed. Harlow, UK: Financial Times
Prentice Hall.
Lalli, W. (2012). Handbook of Budgeting. 6th ed. Hoboken: John Wiley & Sons.
Nelson, S. (2008). QuickBooks 2008 All-in-One Desk Reference for Dummies. Hoboken: John
Wiley & Sons.
Prasath, B. (2017). Advanced Management Accounting. 7th ed. New Delhi: Wolters kluwer.
Ryan, N. (2017). ACCA Approved - F5 Performance Management. Becker Professional Education
Ltd.

Page 6 of 6
Managing Financial Performance, University of Wolverhampton Business School, January 2019
Ryu, J. (2014). The Public Budgeting and Finance Primer: Key Concepts in Fiscal Choice.
London: M.E. Sharpe.
Schmidt, W. and Rieck, D. (2000). Managing Media Services: Theory and Practice. 2nd ed.
Greenwood Village: Libraries Unlimited.
Shim, J. and Siegel, J. (2005). Budgeting basics and beyond. 2nd ed. Hoboken: John Wiley &
Sons.
Tulsian, P. and Tulsian, S. (2012). ICSE Tulsian's commercial studies and applications for class
X. Delhi: Ratna Sagar P.Ltd.