Current economic challenges have caused authorities to reconsider their funding policies. Governments are now considering the use of various budget approaches to ensure there is transparency, accountability, and efficiency in the utilization of public resources. One of the budgeting approaches lauded for its ability to address all of these concerns is zero-based budgeting.

What is Zero-Based Budgeting?

Zero-based budgeting  (ZBB) is where an organization starts its budget base for each new session with zero dollars. Under this concept, the organization needs to justify every program and the money requested for the program instead of only defending the new funds that have surpassed the prior year’s budget margin, also known as incremental budgeting. For example, if an organization wants to fund operations for its third financial year, instead of justifying only the additional funds that have exceeded last year’s budget, it is supposed to account for every dollar that goes to the third year’s budget.

Zero Based Budgeting Vs. Traditional Budgeting

With traditional budgeting, there are incremental increases above previous budgets. For example, a 2% increase in a company’s spending as opposed to justifying both the old and new expenses, as is the case with ZBB. The trend of traditional budgeting is to analyze new expenditures, whereas ZBB begins from zero and justifies the old, recurring expenses as well as new spending. Zero-based budgeting expects managers to justify their expenses and also aims at driving value for an organization through the optimization of costs and not through revenue alone.

The Pros of ZBB

Zero-based budgeting focuses on results and is, therefore, a rational approach to budgeting that prompts managers to determine better strategies for improving operations. Many administrators are in the habit of making suggestions that are not backed by real-time facts and research. This provides the opportunity for the looting of funds. ZBB ensures accountability for all the funds allocated to administrators.

Another advantage of zero-based budgeting is that it leads to the implementation of SMART solutions. SMART stands for Specific, Measurable, Attainable, Realistic, and Time-bound goals. With the use of zero-based budgeting, administrators are encouraged to prepare decision packages that include a clear description of activities, performance measures, the benefits, and the costs associated. This approach provides valuable insight into different programs, units, and events.

The other benefit of zero-based budgeting is the preparation of decision packages. Preparing decision packages gives administrators a better understanding of programs and activities. When an administrator is involved in the decision-making process, they can make more effective decisions. By understanding all the programs and activities involved in implementing a specific resolution, administrators are better able to identify problems and come up with solutions that tackle these problem spots. Overall, administrators who prepare decision packages provide more realistic and cost-effective proposals under the zero-based budgeting scheme than those who make suggestions under conventional systems.

The Cons of ZBB

With zero-based budgeting, some commitments are not recognized as ongoing ones. For example, faculty tenure contracts are not considered though they play a significant role in an organization’s budget.

Zero-based budgeting is also dependent on consistent dedication. This is not something you experiment with to determine whether it will work. It is either you commit fully to embracing it, or you don’t. If you do not dedicate yourself to spending time and resources on this approach, then do not expect to see any positive results.

Is Zero-Based Budgeting Right For Higher Education?

The answer to this question depends on several variables. Although this style of budgeting appears to be right, you need to bear in mind that it is laborious to perform a comprehensive analysis of every coin that is going. For small institutions, this is easy, but for large institutions, this could take time. Overall, you should weigh the cost vs. potential savings.

Zero-based budgeting may be something you engage in every other year or when a new leader is recruited. However, it should be taken seriously to save money and to ensure your business is on top of its spending.

Summing it Up

Zero-based budgeting is a great way to minimize spending and make accurate books in higher education institutions. This approach to financial accounting ensures that leaders are accountable, and it minimizes the embezzlement of funds. Though it may seem cumbersome and complicated for small institutions, it is thorough and improves the management and productivity of institutions.

Matt Frederick

Matt is a Partner at eCapital Advisors and leads the eCapital Advisors IBM Practice. He has overall responsibilities for IBM service delivery, business development and relationship management with IBM. Matt has been working in software consulting and the IBM Cognos product line for over 15 years.

Comments are closed.