Budgeting, Techniques of Budgeting (ZBB, PBB)

Budgeting is the process of creating a financial plan that outlines expected revenues and expenditures over a specific period of time. It is a critical tool for managing financial resources, both in personal and business contexts, as well as in government and public sector organizations.

Effective budgeting helps individuals and organizations to plan for the future, prioritize spending, and make informed financial decisions. It allows for greater control over finances and helps to avoid overspending and debt. In the public sector, budgeting is a critical tool for managing public resources and ensuring accountability and transparency in government operations.

The budgeting process typically involves the following steps:

• Setting financial goals: The first step in creating a budget is to define financial goals, such as reducing debt, increasing savings, or achieving a specific level of revenue or profitability.
• Estimating income: The next step is to estimate the amount of income that will be earned during the budget period. This may include sources such as salary, investments, sales, or grants.
• Projecting expenses: Once income is estimated, the next step is to project expenses. This includes regular expenses such as rent, utilities, and insurance, as well as discretionary expenses such as entertainment or travel.
• Analyzing the budget: After projecting expenses, the budget is analyzed to determine whether it is feasible and aligned with the financial goals. Adjustments may be made to the budget to ensure that it is balanced and sustainable.
• Monitoring and controlling expenses: Once the budget is created, it is important to monitor expenses regularly to ensure that they are within budget limits. Adjustments may need to be made throughout the budget period to stay on track.

Techniques of Budgeting

There are several techniques and methods that can be used in the budgeting process. Here are some of the most common techniques:

• Top-down budgeting: This technique involves senior management setting overall budget targets, which are then distributed to lower-level managers for implementation.
• Bottom-up budgeting: This technique involves lower-level managers preparing their own budgets based on their specific needs and then consolidating them into a final budget.
• Zero-based budgeting: This technique involves building a budget from scratch each period, with every expense justified and evaluated on its own merits.
• Activity-based budgeting: This technique involves budgeting based on the specific activities and tasks that will be undertaken during the budget period.
• Rolling budgeting: This technique involves creating a budget that covers a continuous period, such as 12 months, and regularly updating the budget to reflect changes in the business environment.
• Cash flow budgeting: This technique involves creating a budget that focuses on cash inflows and outflows, rather than just income and expenses.
• Flexible budgeting: This technique involves creating a budget that can be adjusted as circumstances change, such as changes in sales volume or unexpected expenses.
• Performance-based budgeting: This technique involves budgeting based on expected performance outcomes, rather than just funding specific programs or services.

Zero-based budgeting (ZBB):

ZBB is a budgeting method that starts with a zero base and requires each expense to be justified, evaluated and prioritized from scratch. It is a bottom-up approach that involves managers and staff at all levels of an organization to identify necessary expenses and justify the need for funding. Unlike traditional budgeting approaches that use the previous period’s budget as a starting point, ZBB requires that every item in the budget be evaluated and justified every year. ZBB is useful for organizations that want to reduce costs, eliminate inefficiencies, and focus on strategic priorities.

Steps in ZBB include:

• Identify objectives and goals: The first step in ZBB is to identify the organization’s objectives and goals.
• Evaluate programs and services: All programs and services are evaluated to determine their effectiveness in achieving the organization’s goals.
• Develop decision packages: Decision packages are prepared that outline each program or service’s costs and benefits, including alternatives and impact.
• Prioritize and select: Decision packages are prioritized, and those that best meet the organization’s goals are selected.
• Allocate resources: Resources are allocated to selected decision packages, and the budget is built from scratch.

Zero-based budgeting example

In this example, the organization has identified three programs/services and their associated costs from the previous year. The first program, Program A, had a cost of $50,000 in the previous year. The organization has justified an increase in funding for the current year due to increased demand for the service, and the budget for the current year has been set at $70,000.

The second program, Program B, had a cost of $75,000 in the previous year. The organization has justified a decrease in funding for the current year due to decreased effectiveness, and the budget for the current year has been set at $50,000.

The third program, Program C, had a cost of $100,000 in the previous year. The organization has determined that there is no need for an increase or decrease in funding for the current year, and the budget has been set at the same amount as the previous year, at $100,000.

By starting from a zero base and requiring each expense to be justified, evaluated and prioritized from scratch, the organization can identify areas where funding can be reduced, eliminated or reallocated to more critical areas. This can lead to increased efficiency and effectiveness in managing financial resources.

Performance-based budgeting (PBB):

PBB is a budgeting method that links funding to specific performance outcomes. It is a top-down approach that requires performance indicators to be identified, tracked, and measured to determine how well the organization is meeting its goals. PBB focuses on achieving measurable results rather than simply funding programs or services. PBB is useful for organizations that want to align resources with their strategic goals, improve performance, and increase accountability.

Steps in PBB include:

• Identify goals and objectives: The first step in PBB is to identify the organization’s goals and objectives.
• Develop performance indicators: Performance indicators are developed that measure progress towards achieving the organization’s goals.
• Allocate resources: Resources are allocated based on the organization’s performance indicators, with those programs or services that contribute most to achieving the goals receiving the most funding.
• Track performance: Progress towards achieving the organization’s goals is tracked and measured using performance indicators.
• Adjust the budget: The budget is adjusted to align resources with the organization’s performance indicators and goals.

Performance-based budgeting example

In this example, the organization has identified three programs/services and their associated performance indicators. The first program, Program A, measures client satisfaction and cost per client. The organization has set a target of 90% satisfaction and a cost of $500 per client. The actual performance was better than expected, with 92% satisfaction and a cost of $450 per client.

The second program, Program B, measures the number of participants and cost per participant. The organization has set a target of 100 participants and a cost of $1,000 per participant. The actual performance was better than expected, with 120 participants and a cost of $900 per participant.

The third program, Program C, measures the time to resolve an issue and cost per resolution. The organization has set a target of 24 hours to resolve an issue and a cost of $50 per resolution. The actual performance was better than expected, with a resolution time of 20 hours and a cost of $60 per resolution.

By measuring and tracking performance indicators, the organization can identify areas of success and areas that need improvement. The budget can then be adjusted to allocate resources to those programs/services that are performing well and to improve those that are not meeting expectations. This can lead to increased efficiency, effectiveness, and accountability in managing financial resources.