72319102 Finance Revise Ew

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PROBLEM STATEMENT To identify the pros and cons of the Zero-Based Budgeting, evaluating the reason behind their success or failure.

PURPOSE STATEMENT The purpose of this research is to highlight the concept of Zero-Based Budgeting and its application on the local and governmental organizations. This paper also focuses on the strength and weaknesses of the Zero-Based Budgeting and discusses some arising issues of Zero-Based Budgeting and its application in the business world.

SCOPE This research paper will discuss upon the history, drawbacks, solutions, and implementation of Zero-Based Budgeting. It will further highlight the importance of Zero-Based Budgeting in the local and government sectors and try to assess the main reasons behind its increasing popularity in the local and government departments, discussing both positive and negative aspects attached to it.

RESEARCH METHEDOLOGY For the purpose of this research paper, only secondary sources were used. Most of the data that has been referred to is obtained from various business journals, online articles and most importantly books relevant to the course. Some data was also obtained from websites directly and has been referenced in the bibliography.

INTRODUCTION Budgeting is an essential phase of managing the activities of the organization. Budgeting is an important tool for the management not only in the manufacturing

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organization but also in a non-manufacturing organization. A good budgeting system mainly focuses on planning and control. The planning phase concentrates on objective development and preparation of budgets helps in achieving those objectives. Control ensures that the steps taken by the management are planned, and the path to attainment of the objectives is known. Control also ensures that all parts of the organization work together towards achieving those objectives. Zero-based budgeting is a planning procedure that requires the manger to start with the assumption that the base entry of all planning items is Zero dollars. The ZeroBased Budgeting was originally formulated to be used in the government sector in a way to justify cost requests for the succeeding year. The Zero-Based Budgeting procedure forces the planner to completely justify the budget. It assumes that the previous year’s budget is not a valid base from which to work. The primary aim of Zero-Based Budgeting is to justify budget requests for every budgeting cycle, regardless of prior period budgets.

LITERATURE REVIEW The Zero-Based Budgeting technique was originally developed for use in government organizations as a way to justify cost request for the following year. The U.S. department of Agriculture was the first department to implement Zero-Based Budgeting in the 1960s. Although Zero-Based Budgeting was developed by Texas Instruments in 1970s, it was initially adopted by many government organizations during the same period of 1970s and 1980s (Daft, 1997). Zero-Based Budgeting gained fame in

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1977 when President Jimmy Carter introduced Zero-Based Budgeting into the federal budgeting system. The concept had earlier been introduced in an article written by Peter A. Pyhrr in the Harvard Business Review in 1970s. But the adaptation of Zero-Based Budgeting on the federal level spread due to the significant efforts of Jimmy Carter. Before its implementation on the Federal level, Jimmy Carter, the-then Governor of California, along with Peter Pyhrr, tried to implement Zero-Based Budgeting in his state in 1973. The system was to be implemented on the executive budget for the State of Georgia but due to the greater amount of time and effort requirement the implementation was not successful. However, with further modifications Zero-Based Budgeting was largely hailed as a success when introduced to Congress in 1977. Zero-Based Budgeting is used by managers to review and analyze programs, proposals, activities, and functions to increase profitability; enhance efficiency, or lower costs. Zero-Based Budgeting is basically a microeconomic tool that the government uses to transform objectives into efficient operating plans. Zero-Based Budgeting facilitates the state or governmental decision makers to combine planning, budgeting and operational decision making into a systematic process. An important element of this budgeting procedure is that it helps design the priority of government programs and activities. When the government faces deficiency in their revenue, Zero-Based Budgeting plays its part to provide ranking programs and an activity based on overall effectiveness and provides the best available alternatives. In addition, companies such as Xerox Corporation, Westinghouse Electric Corporation, and Texas Instruments Inc. are using Zero-Based Budgeting, and its use is expected to continue to grow (Mathur, 2000).

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Zero-Based Budgeting demands more time and energy than conventional budget, because it enforces management and government officials to develop a consensus among the departments synchronizing the information across all the departments or functions, giving a holistic picture to the decision maker (Daft, 1997).

APPLICATION OF ZERO BASED BUDGETING When the business managers of a local or government organization start working on Zero Based Budgeting, they should follow the following steps: 1. Identification of decision units. 2. Development of decision package. 3. Review and ranking of decision packages. 1)

IDENTIFICATION OF DECISION UNITS Every business manger and government official needs to identify its

organizational structure (decision units) like responsibility centers, cost centers, profit centers, investment centers, etc in order to ensure that the Zero Based Budgeting is applied in its full essence. Decision units should have the following characteristics: •

Every manager is solely responsible for its operation of the program.

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Decisions should be well defined and their impact should be measurable.

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After identification of appropriate decision units, manager or officials should prepare the plan to achieve the goal and also identify the road map in order to support the decision.

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DEVELOPMENT OF DECISION PACKAGES Whether the decision package is in the form of mutually exclusive decision

package or an incremental decision package, the major theme behind it is to identify each decision unit in a manner where management are enable to choose the best alternative. Moreover, each manager is also responsible to identify different levels of effort and its impact on the development of decision package. 3)

REVIEW AND RANKING OF DECISION PACKAGE When the decision packages are ready to apply it should be properly ranked as per

the priority or the management should apply those decisions on its discretionary powers.

ADVANTAGES FOR THE GOVERNMENT Zero-Based Budgeting also has some advantages for the government. The advantages are stated below: i.

Zero-Based Budgeting forces government to identify vague and ineffective expenditures, helping identify the highest utility of a particular resource, thereby ensuring logical and efficient distribution of resources. (Doraiswamy, 2000).

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Allocation of resources under the Zero-Based Budgeting makes the overall process or system more productive. Zero-Based Budgeting not only improves the financial credibility of the government but also provide ways to raising more revenue. (Doraiswamy, 2000).

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Zero-Based Budgeting also identifies where the much needed opportunity is available and highlight populist or unsustainable activities providing the best alternative.

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Zero-Based Budgeting enforces the managers to evaluate the effectiveness and efficiency of every department. Moreover, Zero-Based Budgeting invites all level of management to participate in planning and budgeting process (Williamson, 2005).

DISADVANTAGES FOR THE GOVERNMENT Zero-Based Budgeting also has some disadvantages for the government, some of which are stated below: i.

It does not provide an idealistic initiative to the government, as it may advise you to cut the budget for a department, despite the fact that particular department requires more attention and care to help improve its functionality. (Doraiswamy, 2000).

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Allowing an existing activity to be curtailed indirectly might create negative implications on the project itself and the government on a whole.

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The budgets for most of the third world countries are often prepared on insufficient data, so getting the appropriate results at the appropriate time may not be realistic. (Doraiswamy, 2000).Moreover, Zero-Based Budgeting is a time consuming and complicated exercise.

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In a period of economic uncertainty every investor, both domestic and international, expect the government policies to remain unchanged which may not be feasible under Zero-Based Budgeting. (Doraiswamy, 2000).

RESEARCH OUTCOME After evaluating and assessing the various areas of Zero-Based Budgeting, a summary of the research outcomes is stated below:

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Zero-Based Budgeting is not only helpful for the government but also helpful for other organizations in order to set the links between budgets and objectives.

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Zero-Based Budgeting may create hurdles in identifying suitable performance measures and decision criteria. Zero-Based Budgeting supports better resource allocation.

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The use of Zero-Based Budgeting is based upon the discretionary power of the management of the company or the government officials.

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Zero-Based Budgeting pays attention on the actual resources that are required in order to produce an outcome, rather than the percentage increase or decrease compared to the previous years.

CONCLUSION Zero-Based Budgeting enforces all levels of management in an organization to become a part of the budgeting process. The adaptation of Zero-Based Budgeting in a government organization or even a private firm can make a significant difference to their resource allocation, despite a few negatives mentioned above. The element of splitting budget makes a significant impression on the decision process and allows management to look at their business from a micro point, and take a better decision after a detailed analysis of each and every segment. The concept of Zero-Based Budgeting is based on the theme that what you have in the future depends on your ability to persuade the present.

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REFERENCES Daft, Richard. (1997). Management. Harcourt Brace College Publishers. Doraiswamy, P. K. (2000, March 15). Is zero-base budgeting feasible in Govt.? Retrieved 09/25/2009, from http://www.hindu.com/2000/03/15/stories/0615000f.htm Keown, (2002). Personal Finance: Turning Money Into Wealth,First Canadian Edition. Canada: Pearson Education Canada. Mathur, Iqbal (2000). Introduction to Financial Management. New York: Collier Macmillan International Editions. Williamson, Duncan (2005,May 20). Zero Base Budgeting. Retrieved 09/25/2009, from http://www.duncanwil.co.uk/Zero.html

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