Answer:
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The budget starts from the “zero base” and any function within the government is analysed according to their needs and costs.
Benefits of ZBB:
• Eliminates redundant and duplicate programs: The primary objective of zero-based budgeting is the reduction of unnecessary costs as it aims at scrutinizing all existing programs and activities and identifying redundant and duplicate activities.
• Efficient resource allocation: Through cost-benefit examination, it classifies activities into low and high-priority activities. High-priority activities are prioritized for resource allocation. In this way, resources are allocated from low-priority programmes to high-priority programmes.
• Allows alternative methods of operations: All expenditures and operational activities under ZBB are critically reviewed and justified in terms of their cost-effectiveness. This requires policymakers to find efficient alternative ways of performing their activities.
• Quick budget adjustments: ZBB provides for quick budget adjustments during the year. If the expected revenue falls short, it offers the capability to quickly and rationally modify goals and expectations to correspond to an affordable plan of operations.
• Enhances employee efficiency: ZBB ensures greater participation of personnel in the formulation and ranking processes. This helps in promoting job satisfaction, thus, resulting in better control and operational efficiency in the organisation.
Limitations:
• Demands effective management of internal organization: Since ZBB challenges past practices and involves cost-cutting, the potential for resistance can be particularly high and thus requires effective management of the internal organization.
• Complex procedure: ZBB is a time-consuming and more complicated process than conventional budgeting. Thus, it requires more staff with specific training and demands a great deal of time and effort. Moreover, explaining every line item can be challenging for departments with intangible outputs.
• Paperwork and handling issues: ZBB involves huge amounts of paperwork. Each decision unit is supposed to prepare decision packages and give proper justification for their budget requests.
In government departments, where there are thousands of programmes and activities, the number of decision packages may run into several thousand. This is bound to create handling problems and confusion.
• Short-term focus: Zero-based budgeting emphasis on justifying each expense can lead to a focus on short-term needs, neglecting long-term benefits.
Zero-based budgeting is a powerful tool for organizations seeking to optimize resource allocation, drive growth, and enhance financial discipline. By identifying opportunities to reallocate resources toward strategic initiatives, ZBB enables organizations to unlock the resources needed for future growth and innovation.