A white paper by the Government Finance Officers Association (GFOA) defines zero-based budgeting (ZBB) as “a budgeting process that asks managers to build a budget from the ground up, starting from zero.” Once popular in the 1970s, interest in ZBB has diminished over the last few decades due to the large amount of paperwork and data to be managed when putting ZBB into practice. However, thanks to the availability of cloud-based budgeting software, and the growing popularity of performance management in business, zero-based budgeting is currently experiencing a comeback. But is ZBB right for your government agency?
Although private sector companies use ZBB for reasons ranging from improving profitability to slow growth in their industry, the emphasis on scrutinizing every dollar spent is where the appeal of implementing ZBB lies. When companies need to make faster decisions and find smarter business models, many around the world are turning to ZBB for its structured approach to cost management and the subsequent opportunity to reinvest the savings into their business. According to an Accenture 2018 study, since 2013, “ZBB adoption has exponentially grown by 57 percent every year.” Some of the companies who have embraced zero-based budgeting include Campbell Soup Co., Kellogg Co. and Ford Motor Co.; however, smaller organizations can also benefit from the cost savings of ZBB.
In the public sector, no government agency has implemented ZBB for an extended period of time, as budget managers find it too laborious to go through the process of justifying every program and service on a yearly basis. As an alternative, governments in the U.S. and Canada have chosen to adopt ZBB for short periods ranging from four-to-eight year cycles, or as a tool to analyze programs and services outside of the budgeting process. As a result, those government agencies have been able to determine priorities, streamline programs and services, and reduce costs.
How does zero-based budgeting work?
For a government agency interested in becoming more accountable in their spending, ZBB can bring a fresh perspective to your budget. In contrast to traditional incremental budgeting, a zero-based budget starts at zero and doesn’t take into account what happened in the last budget. Instead, the budget will be tied to your agency’s programs and services with each needing to be described, justified and submitted for approval by department managers in an effort to allocate funds economically and strategically.
While the textbook form of ZBB is rare in practice, the elements from ZBB theory budgeting managers are adopting include these two popular methods:
Zero Line-Item Budgeting
Each department is required to describe their department goals for providing programs and services, and how each line item they submit for inclusion in the budget aligns with their goals. This method of ZBB increases awareness of how money is spent and helps to identify how resources could be used more efficiently. Since managers from all levels of responsibility are involved in this type of budgeting process, the result is a better understanding of the budget and buy-in of the final spending decisions.
Service Level Budgeting
The organization is divided into “decision units” along functional or organizational lines. The managers of the units create an overview of their programs and services, and the cost to execute their programs. The overview is used to create “decision packages” to be ranked for perceived value and likelihood of success, and then used as a basis for deciding how funds will be allocated in the budget. Since service level budgeting requires a substantial amount of paperwork, budget managers from the past have tried to mitigate the amount by using tactics such as only implementing ZBB on a biennial basis or only having a certain percentage of their departments participate in the process.
Zero-based budgeting pros and cons
Since no two organizations have implemented ZBB the same way, there isn’t any evidence on the effectiveness of ZBB when put into practice. However, the known benefits of ZBB include:
Moves away from incremental budgeting
ZBB promotes thinking about the budget as a whole and not just the increments.
Rationalizes budget cuts
Budget managers are able to avoid across-the-board cuts to funding and have a higher level of confidence in their cutback decisions.
Shows the trade-off between inputs and outputs
ZBB highlights how the level of service a department provides changes in relation to the dollars spent.
Besides the large amount of staff time required to implement a ZBB budgeting process, some of the weak points include:
ZBB requires a tremendous amount of paperwork to justify all of the line items a department wants to include in the budget, plus the paperwork by the manager ranking the decision packages and the paperwork of higher level managers who approve each line item.
Doesn’t review existing programs and services
ZBB assumes that current programs and services should continue to be funded, and doesn’t explore whether changes are required or if the programs and services should be discontinued.
Alternative service delivery options aren’t addressed
Although decision packages give managers an opportunity to submit alternative service delivery options, most opt for keeping the status quo.
A key element of successfully using ZBB is setting performance measures that can be used to analyze the operation and outcomes of programs and services funded by the budget. Performance measures can help determine whether a program or service is successfully meeting department goals, needs to be adjusted or a new option should be considered.
Budgeting software removes the challenges of zero-based budgeting
Budgeting is already a tough process, so is ZBB right for your government agency? If managed effectively, ZBB could help to improve cost management and lead to more focused discussions about how funds should be allocated in your government agency. When managers are responsible for deciding what goals require funding for their department to be successful, their decisions help align department strategy to your government agency budget, creating a culture of cost and performance management. However, the downside is that your government agency will have to start the budget from scratch, as well as gather and review a considerable amount of information.
In the past, ZBB made budgeting a chore due the large volume of data and information to be managed. Using spreadsheet software made the process even more troublesome due to its lack of scalability and susceptibility to errors. Budget managers have abandoned the idea of using ZBB saying it was too cumbersome to sustain over a long period of time when the potential savings were uncertain.
Today, budgeting software that is dynamic and cloud-based can take away the challenges companies previously faced implementing ZBB. Budgeting software replaces multiple offline spreadsheets by providing a central location for data that can help your government agency calculate expenses and understand cost drivers. In particular, Questica Budget’s multi-user software allows you to manage the budget, as well as forecast, analyze, report and create what-if scenarios. Furthermore, you can produce accurate staff compensation budgets including salaries, benefits and increases. With Questica Performance, you can also monitor your performance measures and make decisions faster with a system that provides you with meaningful insight into your budget data. If your government agency wants to reduce costs and reinvest potential savings, zero-based budgeting is a real possibility by using a comprehensive, streamlined system like Questica Budget.
Questica Budget is a powerful, multi-user budget preparation and management software suite that helps your public sector organization run operating, salary and capital budgets with accuracy and efficiency. Integrating with dozens of financial systems, Questica Budget has everything you need in one place to develop, track, monitor and adjust your budget, plus generate custom reports and create what-if scenarios. Imagine no longer having to enter data into error-prone Excel spreadsheets, and having time to analyze and plan for the budget. In addition, Questica’s OpenBook transparency and data visualization software makes sharing financial information effortless. Your stakeholders will have a better understanding of your budgeting goals when the budget is brilliantly visualized with descriptive text, informational pop-ups, charts and tables. To learn more about Questica’s products and how our software solutions can help you manage the budget with confidence – watch a product video, read one of our case studies/whitepapers or request a demo today!