Zero Base Budgeting


Zero base budgeting is again a management tool, but unlike the performance budgeting mentioned earlier, it has no direct linkage to the budget framing process. It can best be described as a pre-budget exercise, aimed at ensuring a practical and realistic allocation of resources according to predetermined priorities. A simple example should clarify the concept..

An entrepreneur is engaged in a manufacturing activity and has several product lines viz. A, B, C, D and E. He has invested resources for all these products in terms of manpower, material, services, marketing, etc according to the needs of each product. He has planned the production based on certain preliminary studies and premises. Being a good entrepreneur, he has periodical review and evaluation process going on which reveals different results for different products. Product A is doing extremely well and supply is much less than the demand. Product B and C are faring well according to expectations. For product D certain modifications appear to be necessary, while product E has proved to be a washout. The entrepreneur would take immediate steps to discontinue production of E and divert the resource to his other product viz. A which has a high potential. In the process the entrepreneur may be able to utilize the existing manpower and machinery used for the product E for the expanded activity for product ‘A’ or may have to dispense with partly or wholly the manpower rendered surplus and get rid of the unwanted machinery. He takes action accordingy. In doing so he is following consciously or unconsciously, the principle of zero base budgeting.

What is true in the example cited above would be generally true in respect of the activities of Government also. The only snag is that the exercise is not so simple or straightforward and is fraught with a number of undercurrents. Government’s activities are not comparable to a purely commercial enterprise where optimization of profit is the principal motive. Government has its social obligations. It cannot cut down on staff summarily for various considerations legal and humanitarian, reactions from the employees' unions, political pressure etc. Also the review and evaluation technique cannot be standard or uniform for the varied activities of different Government departments.

All said and done this does not detract from the soundness of the principle of zero base budgeting which is based on prioritisation of the activities and elimination of the least desirable ones.
Each department with some imaginative and original thinking and pragmatic assessment of its activities should be able to devise review systems to enable them to redirect their resources within the departmental activities, by causing the least amount of disturbance and disaffection.

The Government of Maharashtra had embarked upon the zero base budgeting experiment in the latter part of the eighties. While this effort was acclaimed by some having the right perception of the importance of this management tool, by and large it had a cool reception and had to be practically abandoned in the course of time.

Thursday, 04th Feb 2016, 11:40:46 AM

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