Budgetingby John Kind
The ZBB approach
A typical checklist of the questions to ask when carrying out ZBB would be as follows:
- Is the activity really necessary?
- What will happen if the activity stops?
- What are the different ways of carrying out the activity?
- How much should the activity cost?
- Do the benefits gained from the activity match its costs?
Steps involved in carrying out a zero-based budget
When carrying out a zero-based budget, the first step is to identify the activities taking place in a department, division or function.
That done, for each activity, you need to
- Calculate its cost
- Define its purpose
- Identify different ways of achieving the same objective
- Establish performance measures for the activity; these performance measures should be both financial, such as expenditure levels, and non-financial, such as waiting times and queue lengths
- Assess the consequences of not performing the activity or of performing it with fewer or more resources
- Decide on the ZBB option to be adopted, using cost-benefit analysis.
What is cost-benefit analysis (CBA)?
CBA estimates the financial value of the benefits and costs of a project, for example, the construction of a motorway, the building of a school or the implementation of a new health-care system. The cost-benefit idea suggests that a financial value can be put on all the costs and benefits of a specific project, including both the tangible and intangible factors.
If ZBB was used by the Head Teacher in a school, one of the school’s activities could be the provision of lunches. The school catering manager might consider three options:
- Provide an area in the school where students can bring their own food, with drinks being sold by the school’s catering staff for a small charge
- Provide a self-service café, with students being charged for hot and cold food and drinks
- Provide a full catering service for students, with hot and cold food and drinks available at no charge. This full catering service could be provided internally or the whole catering service could be outsourced to an external provider.
The ‘base’ level of service is Option A, with Options B and C providing higher service level options.
To take matters to the next stage, a cost-benefit analysis needs to be carried out for each option.
- Completing a cost-benefit analysis for Option A – the lowest level of catering provision – is likely to show this to be the most cost-effective. But this option may show the school in the most unfavourable light; parents may regard the absence of a full catering service as an indicator that the school does not really care for its students. This may discourage some parents from sending their children to the school and student numbers may fall. This may affect the ability of the school to attract public funding in the future.
- Completing a cost-benefit analysis for Option B – this offers a medium level of catering provision. However, some parents may be unwilling and/or unable to pay the charges for food and drink and the reputation of the school may suffer. The school may have to subsidise poorer parents.
- Completing a cost-benefit analysis for Option C – this offers a ‘full service’ catering provision. It is the most attractive option for parents and their children, but the costs to the school will be significantly higher than Options A and B. These increased costs may affect the level of resourcing for other school activities, such as school outings and sport.
Once the full facts are available for each option, a decision will need to be made about which option to go for. As we have seen, this final decision will be influenced by a blend of financial and non-financial factors.