## Zero-Based Budgeting (ZBB)
### Definition
ZBB is a budgeting method that starts from zero rather than from last year's figures. Every cost element must be freshly justified, regardless of whether the activity is new or ongoing. Any budget without proper justification receives a zero allocation.
### How ZBB Differs from Traditional Budgeting
| Dimension | Traditional Budgeting | Zero-Based Budgeting |
|---|---|---|
| Starting point | Last year's budget + adjustments | Zero — clean slate |
| Orientation | Accounting-oriented (past expenditure) | Decision-oriented (future value) |
| Reference | Past spending + inflation | Decision packages only |
| Budget inflation | Managers inflate requests to cushion cuts | Inflated requests are caught by rational analysis |
| Decision responsibility | Top management allocates | Manager of each unit justifies and is accountable |
| Alignment | May lack strategic alignment | Departmental budgets tied to corporate objectives |
### Stages in ZBB
1. Identification & Description of Decision Packages — identify programs/activities; describe technical, financial, and other factors.
2. Evaluation of Decision Packages — assess against organisational objectives and resource availability.
3. Ranking (Prioritisation) — rank packages by priority and importance.
4. Allocation of Resources — allocate based on ranking, with no reference to previous budgets.
### Best Suited For
- Corporate entities: Discretionary costs — R&D, training, advertising.
- Non-corporate entities: Government departments, local bodies, not-for-profit organisations (e.g., mid-day meals, street lighting, drinking water).
### Advantages of ZBB
- Systematic evaluation of all activities.
- Enhanced function performance — only activities that contribute are funded.
- Thorough cost-benefit analysis before allocation.
- Identifies and eliminates wasteful expenditure.
- Aligns departmental budgets with corporate objectives.
- Supports Management by Objectives (MBO).
### Limitations of ZBB
- Very time-consuming and tedious — requires fresh data for all decision packages every cycle.
- Activities are still selected along traditional functional department lines, so implementation may be incomplete.