Zero Based Budgeting and Covid19

The Covid19 epidemic has disrupted the economies of almost all the countries in the world including Sri Lanka.

The finance chiefs of both public and private sector should take a fresh look at the activities and projects under their purview when preparing budgets. The Zero Based concept of budgeting that we have forgotten over the years is the best tool that can be used under this scenario.

Definition of Zero Based Budgeting (ZBB);

“ZBB is a management tool which provides a systematic method for evaluating all operations and programmes, current or new, allows for budget reductions and expansions in a rational manner and allows re-allocation of resources from low to high priority programmes.”

The United States Department of Agriculture introduced this system in 1964, but it was not found to be quite successful and, hence, abandoned.

Pytor, A. Pyhrr, a staff control manager of Texas Instrument Corporation (USA), studied and developed this concept and created an awareness among the financial mangers through his writings. That was in early seventies. Since then many private sector organizations in the USA adopted this concept in their budgetary control mechanism.

When Jimmy Carter became the governor of the State of Georgia successfully used the technique in the state budgetary control process saving millions of dollars. When he became the president of the USA, the concept was introduced to the Federal Government, in 1977. As a result many countries looked at this positively and adopted the concept. Even in Sri Lanka the General Treasury attempted to introduce the ZBB in 2002. Then Director General of Department of Public Enterprises Mr.V. Kanagasabapathy took a keen interest in introducing the technique to the public enterprises.

The basic idea is that each year’s budget should start from a zero base, rather than from the prior year’s spending. To facilitate this the process, start with identifying all expenditure components and then following points are to be considered under each component;

(i) Is it absolutely necessary? (Justification)

(ii) What should be the qualitative features of current activities? Can we improve them?

(iii) Will production/services be continued according to the existing system?

(iv)  What is the cost of production/service under current conditions?

ZBB is not a cost control method. But it is to create a mentality where people throughout the organisation think about value, not just cost. Of course, the end result would be identification of wasteful expenditure and eliminate them when you find an answer to ‘’Why should I spend?”

Ultimately the concept can change the culture of the organization when it will help everyone to think like an investor.

According to Wall-Street Journal many companies in the USA are turning to ZBB to take a more detailed look at their companies’ spending to enable them to face the present economic downturn, better.

Therefore I feel Public sector as well as private sector organizations should seriously think of switching over to ZBB when preparing respective budgets including National Budget.

Rohan Abeygunawardena ACMA, CGMA

Financial & Management Consultant