Basic knowledge of Performance Budgeting, Zero-Base Budgeting

Basic Knowledge of Performance Budgeting & Zero-Base Budgeting is a significant chapter in the subject Accounting & Auditing that introduces modern budgeting techniques used for effective financial planning and control. This chapter helps in understanding how resources are allocated based on performance and how budgeting can start from a “zero base” to justify every expense.

Previous Year Questions

Year	Question	Marks
2023	Write down four essential features  of zero based budgeting ?	2 M
2023	Write any two objectives of performance budgeting as recommended by the Administrative Reforms Commission.	2 M
2021	Why was Zero Base Budgeting adopted by the Government of India?	2 M
2021	Performance Budgeting is useful for Government and Public sector undertakings. Why?	5 M
2018	What do you understand by ‘Budgeting’ ?	2 M
2018	Write a note on ‘Zero base budgeting’.	5 M
2016	Give any two differences between traditional budgeting and zero base budgeting.	2 M

Budgeting

Budget: 

The budget is a document, presented by the Government, of income and expenditure for a given period of time. 

Accountability is an outstanding feature of the budget in a parliamentary democracy, which serves as a valuable tool for management, facilitates economic analysis, and acts as an instrument of fiscal policy.

Budgeting:

• Budgeting is a process of preparing a detailed financial statement incorporating revenue and expenditure estimates for the forthcoming financial year. 
• It is a tool which is used by the governments to manage public funds.

Aspects:

1. Income and revenue
2. Expenses and expenditure
3. Resource allocation

Zero Base Budgeting

• It was introduced by Peter Pyhrr in the 1970s.
• In India, ZBB was first introduced in the department of science and technology in 1983 and in all ministries during 1986-1987 Year.
• Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. 
• The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs. 
• The budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

Definition:

Peter Sarant defines ZBB as “a technique which complements and links to existing planning, budgeting and review processes. It identifies alternative and efficient methods of utilizing limited

resources and is a flexible management approach which provides a credible rationale for reallocating resources by focusing on a systematic review and justification of the funding and performance levels of current programs”.

Key Features of ZBB:

• Justification-Based Allocation – Each department must justify its expenses from scratch.
• Focus on Cost-Benefit Analysis – Ensures efficient utilization of funds.
• Eliminates Past Budgetary Bias – Does not rely on previous budgets, avoiding unnecessary expenditures.
• Encourages Accountability – Managers are responsible for justifying their budgetary needs.
• Flexible and Adaptive – Can be modified as per changing government priorities.
• Funds are allocated based on the needs and benefits of each activity, rather than historical spending.

Significance: 

1. Efficient Resource Utilization : Ensures funds are allocated based on actual needs rather than historical spending patterns.
2. Accuracy: Zero-Based Budgeting (ZBB) reviews every expense from scratch, unlike traditional budgeting, which adjusts the previous budget. This makes it more precise and helps in cost reduction.
3. Reduction in Redundant Activities : Identifies and removes unproductive or redundant activities, leading to cost savings. (Fiscal Discipline & Budget Deficit Control)
4. Prioritization of Developmental Schemes : ZBB helps to identify which programs are effective and need funding while discontinuing ineffective ones.
5. Prevents Budget Inflation : Unlike incremental budgeting, ZBB justifies every expense, preventing unnecessary budget increases.
6. Flexibility to Adapt to Changing Needs : ZBB allows the government to reallocate funds based on evolving economic and social priorities.
7. Better Coordination and communication : Enhances communication among departments, motivates employees, and encourages their involvement in decision-making.
8. Greater Accountability & Transparency
9. Improves public finance management

Limitations:

1. Time-Consuming – ZBB requires detailed analysis in a short time, making it more time-intensive.
2. Requires Huge Manpower : Implementing ZBB needs a large workforce, making it difficult for organizations with limited staff.
3. Lack of Experience : Executives need proper training to justify costs and actions, but many lack the required experience, making implementation challenging.
4. Increases departmental workload
5. Management factors: Whenever any cost control technique like zero base budgeting is adopted there is resistance from certain individuals and groups having interest in the organisation.
6. Short-term focus
7. The justification process in ZBB may be subjective.

Steps for the Preparation of Zero Base Budgeting

Traditional Vs Zero Base Budgeting

Aspect	Traditional Budgeting	Zero Base Budgeting
Emphasis	Accounting-oriented, focuses on “How much” is spent.	Decision-oriented, focuses on “Why” the expense is necessary.
Approach	The approach is to take past for granted without any questioning of the past changes in quantitative data.	The quantitative data of the past is questioned on the ground to justify the need for its continuation.
Focus	Analyzes changes in expenditures (increase or decrease) over time.	Conducts cost-benefit analysis to justify expenses.
Communication	Vertical communication (top-down approach).	Both horizontal and vertical communication (involves multiple levels).
Methodology	Uses past figures to predict future budgets.	Evaluates each expense from scratch using cost-benefit analysis.

Performance Budgeting

• The technique of Performance Budgeting developed in the United States of America (U.S.A.) and it gained considerable appreciation after the publication of the First Hoover Commission’s Report (1949).
• In India, on the recommendations of the First Administrative Reforms Commission, the Government of India decided to adopt it on the selective basis from 1968-1969.
• Philosophy → Process evaluating productivity of different operations and allocating larger share of available resources to the operations contributing more.

Definition:

• Performance Budgeting is a technique of budgeting in which government operations are presented in functional categories in terms of functions, programmes, activities and projects reflecting primarily, the governmental output and its cost.
• Performance Budgeting represents a management approach to budgeting.
• The main thrust of performance budgeting has been on providing output-oriented budget information within a long range perspective so that resources could be allocated more efficiently and effectively.
• Its emphasis is on accomplishment rather than on the means of accomplishment. 
• It establishes a correlation between the physical (performance or output) and financial (input) aspects of each programme and activity. 
• Eg: Output-Outcome Monitoring framework (OOMF) of NITI AAYOG 

Objectives of Performance Budgeting: (First ARC – First Administrative Reforms Commission)

• To link financial expenditure with physical achievements of government programs.
• To improve budget formulation, review, and decision-making at all levels.
• To facilitate better understanding and review of the budget by the legislature.
• To enhance accountability of government departments in achieving planned outcomes.
• To enable effective performance audits for measuring progress and efficiency.
• To track progress toward long-term development goals.
• To align the budget with national development plans for better coordination.

Significance:

• Clearly defines the goals and objectives of government programs.
• Ensures clear responsibility and accountability for program performance.
• Increases transparency by providing clear information on government activities.
• Helps in better problem identification and resolution.
• It facilitates management control and makes legislative review more insightful.
• Improves the ability to assess service efficiency and effectiveness.
• Makes budgetary decisions more informed and evidence-based.
• Enhances public support by increasing awareness of government activities.
• Sets performance standards to measure and evaluate outcomes.
• Helps administrators effectively communicate their work to the government and public.

Characteristics:

• Data-driven
• Resulted oriented
• Continuous improvement
• TAR (Transparency, accountability, Responsibility) focused

Limitations:

• Difficult to classify government work into well-organized functions, programs, and activities.
• Program classifications may be too broad for effective decision-making.
• Focuses more on quantitative than qualitative evaluation.
• Cost allocation is complex and may not always be accurate.
• Does not fully resolve project comparison issues without cost-benefit analysis, which has its own limitations.

Basic knowledge of Performance Budgeting Zero-Base Budgeting / Basic knowledge of Performance Budgeting Zero-Base Budgeting