Zero-base budgeting (also called zero-based budgeting, or ZBB) is a system of BUDGETING in which all expenditures are justified each year. This is in contrast to the typical budgeting process that evaluates only amounts in excess of the previous year�s budget. In ZBB each department must justify all of its funding for the next year. This process starts with an assumed �zero base� and must show how every expenditure helps the organization meet its objectives. Peter A. Pyhrr at Texas Instruments first introduced ZBB; nonprofit and government organizations quickly adopted it and are its most enthusiastic users. ZBB usually involves the following steps.
1. Define the organization�s mission and goals.
2. Identify the organization�s decision units. A ZBB decision unit is an operating division of the organization, usually a cost center or budget center. The decision unit develops decision packages.
3. Identify a decision unit�s decision packages. These are descriptions of each program that will be operated by the decision unit. A decision package states a specific contribution it makes toward reaching the organization�s objectives and usually presents several alternate ways that it could make its contribution towards the objectives. For each alternative, the decision package will specify objectives, activities, RESOURCES, COSTS, etc.
4. Analyze decision packages. Managers must review each decision package to determine if in fact it contributes to the mission and objectives. They must consider the impact of eliminating the decision package and must review the alternatives to determine which decision package alternative is most cost-effective.
5. Rank decision packages. After the analysis, management must rank the decision packages relative to its cost-effectiveness and how well it contributes to the overall goals and objectives.
6. Prepare a budget. This pulls together the cost of each of the decision packages that have been approved.
7. Monitor and evaluate actual budget performance. This is relatively easy after the work already done to develop the decision packages� objectives.
The process of developing goals, identifying decision units, and developing, analyzing, and ranking decision packages is more beneficial than the actual budget savings that the process produces. The organization can use the process to organize their thinking relative to the organization�s overall priorities. Everything and everyone has to justify their continued existence in light of the organization�s mission. Most ZBB critics point out that it sounds good to consider everything starting from a zero base. However, most of the items in an organization�s budget are not as flexible as ZBB assumes. Many organization costs are a product of previous ORGANIZATIONAL COMMITMENTs. Interest, LEADERSHIP salaries, utilities, DEPRECIATION, and INSURANCE are more or less fixed and must be immediately added to any budget that assumes the organization�s continuation. In many organizations this leaves precious little to be evaluated from a zero base.