The zero-based budget requires the construction of a budget from scratch with a zero base. The accounts manager is required to re-evaluate every line item of cash flow statement and justifying all the expenditures that are to be incurred by all the departments of an organization. To construct this budget, the manager doesn't have to depend on any reference point to think over a particular item of a budget, careful analysis is done to ascertain the required funds. The detailed budget is prepared which prioritize profits over expenses to give preferences to direct profits centres over an indirect one. Since cost centres does not provide immediate profits, they are responsible for long term survival and profits of a company. if they are not analysed properly, the whole company will get affected and there is no reference of previous years' budget. Thus the complexity of zero-based budget imposes contingencies to an organization. To meet the contingencies of analysis and estimations used in constructing ZBB, managers add 15-20% additionally to a zero-based budget to manage an organization effectively.
The process to implement ZBB in an organization is as follows:
Determine the objectives of the ZBB program: The major purpose of implementing ZBB is cost reduction and better control. Management must be particular to the exact goal of implementing ZBB in an organization unless it will impact other decisions. If cost reduction is the main reason for adopting ZBB systems, the exact cost must be known before construction of a budget. Along with this the scope of the program and its influence on overall organization must be determined while designing a ZBB program.
Obtain spending visibility: ZBB is about choices, where to invest and where to constrict. An organization must decide which aspect of an organization they will target to grow its business. So, that they can allocate required funds to that specific aspect as the actual plan and results desired can reveal the true spending of an organization. Even the details of spending are required as follows:
- Who controls the spending?
- Where is the money spent?
- What is the Purpose of spending money?
The visibility will provide information on all financial and non-financial drivers, which influence the working of an organization.
Develop standard ZBB templates: The accounts manager is required to build a template of a budget in excel. Excel will provide flexibility and can easily consolidate all the factors of a budget. While choosing the template, a manager must consider some factors such as:
- Who will populate the template: The budget owner or someone in finance?
- What level of detail is required from budget owners: the level of detail required will determine the template of a budget?
- What are the different categories of a cost? In healthcare organization, Research, and development, training to doctors, nurses, medicine and equipment's are the main categories of cost.
Change management for an organization: To implement the change significantly the management must communicate with every department of an organization. They must obtain consent from all the broader organization and align senior leadership to implement cost-saving initiatives and communicate with the decision makers.
Make strategic choices: An organization must take all the decisions strategically that where to spend and where not to spend. It is the most significant part of implementing the ZBB program. The decision will be taken by considering volume and rates.
Rate * Volume = Cost
Monitor and control changes: The management is required to strongly implement and control the changes planned and the actual results will be compared with the planned results throughout the year. If the deviations derived are negative, it must be understood and rectified timely to maintain the efficiency and avoid wastage of resources.
Repeat the processes or not: After evaluating the results of the implementation of the ZBB program, the management will decide whether to follow this practice in future years or not. The decision will be based upon the cost-benefit analysis of the implementation of the ZBB program, if the benefit is more than the cost incurred, the practice will be continued unless it will be restricted.