Zero based budgeting
As the name
suggests, zero-based Budget refers to preparing a Budget with zero prior base
or from the scratch. Zero-based
budgeting is a method of budgeting in which all expenses of each and every
ministry must be reviewed and justified in order to receive funding for each
new period (financial year).
In zero based budgeting, every function is analyzed and
justified starting from zero. From this perspective all the companies
departmental budgets are examined to see if their function contributes to the
companies needs in the upcoming period; if so, a budget determination is made
based on how much that department will need to perform its function. When used,
zero based budgeting forces managers to be more cost effective. It also
motivates employees by giving them greater responsibility in decision making.
In addition zero based budgeting identifies budget that may have bloated over
time, wasteful & obsolete processes and areas where outsourcing may be a
better alternative. But downsize of zero based budgeting is that it favours
departments that generate revenue over departments such as HR and accounting
where the benefits are less tangible.
Here is an example of
how Zero-Based Budgeting works
Let’s suppose X amount of rupees are
to be allotted to MP’s every year under a government scheme and if the whole
amount is not spent by any MP then it can be carried forward to next period.
But in zero-based budgeting, this money would not be allotted to those who did
not spend, rather it will be given to those MP’s where it is more needed or
used more effectively.
Zero-based
budgeting identifies alternative and efficient methods of utilising limited
resources.
This
system was rejected by policy experts as they said it is an impractical budget-making
decision. However, after the global financial crisis of 2008, Zero-Based
Budgeting came back into the focus for its emphasis on judicious spending
during the Budget formation.
Zero-Based Budgeting
in India
In India, this type of budgeting was adopted by
the department of science and technology in 1983. In 1986, the Indian
government implemented this as a system for deciding Expenditure Budget. The
government made it compulsory for all ministries to review their activities and
programmes and prepare their expenditure estimations based on this concept. In
the seventh Five-Year Plan, this system of budgeting was further promoted by
the government but not much progress could take place later.