Identifying wasteful expenditure
In zero-based budgeting (ZBB) a new budget is prepared every year without reference to last year’s budget with every budget item needing to be approved to be included. This has the advantage over traditional budgets in that every line item of the budget, rather than only the changes, must be considered, evaluated, and approved.
ZBB was developed by Pete Pyhrr, a young manager with Texas Instruments in the 1960s, to help businesses shave costs. Zero-based budgeting is a ‘tremendous’ tool, Mr. Pyhrr said, ‘especially in times of economic problems, when you need to make reductions, or when you have significant and rapid technological change’.
The advantages of zero based budgeting include:
- Efficient allocation of resources as it is based on needs and benefits rather than history.
- Drives managers to find cost effective ways to improve operations.
- Detects inflated budgets.
- Increases staff motivation by providing greater initiative and responsibility in decision-making.
- Increases communication and coordination within the organisation.
- Identifies and eliminates wasteful and obsolete operations.
- Identifies opportunities for outsourcing.
- Forces cost centres to identify their mission and their relationship to overall goals.
- Facilitates more effective delegation of authority.
Zero-based budgeting helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action. H.J. Heinz Co has used the technique to slash costs in everything from jobs to corporate jets and the use of colour photocopies.