Zero-Based Budgeting ZBB

I was responsible for finance in a largish public sector organisation newly given financial independence. Until then over levels of budget were set at the organisational level and internally historical costs were used to chop up the budget to costs centres. On historical costs bases Department  heads assumed they would get what they got the year before with some added on top. Department heads would talk to their staff and  Section Heads and add their wish list to their own and then put their increased request in full. They knew they would not possibly get all they asked for (but perhaps they would) and they didn’t need to disappoint any staff by crossing off their particular request. Actually that was the method of the better Department heads. Others never even asked their staff and put in their own wish list. It was left to the senior Finance Managers to reduce this inflated list without the quality information to support it. Then I visited America and an organisation that used Zero Based Budgeting.  This reverses the budgeting process. In Zero-based budgeting Department Heads and Section Managers start with no agreed budget.  They have to analyse every line of their budgets and justify each cost based on their business plans for the year ahead. This was not too onerous as “overhead costs” were still budgeted centrally based on effective cost saving principles. Heads were only able to put in their budget costs that could be justified from their projected income. They then had to monitor expenditure against this new agreed budget. The organisation grew in the year following and expenditure was cut by £300,000 so allowing re-investment in key projects. It really does work.