Zero Based Budgeting: Definition, Process, and Advantages

This report explains Zero Based Budgeting (ZBB), its definition, process, and advantages over traditional budgeting methods. It also includes a cash flow forecast for hotels and practical implementation tips. The report highlights the importance of ZBB in building or improvising business processes by renovating the budget structure with newer techniques as compared to traditional methods. It also provides a comparative analysis between ZBB and traditional methods.

CONTINENGTAL
HOTEL BUDGET
PLANNER

Contents
INTRODUCTION...............................................................................................................3
TASK:..................................................................................................................................3
1. Cash flow forecast for the Hotel with respect to forthcoming year: -.............................3
(Covered in Excel)...........................................................................................................3
2. Report on Zero Based Budgeting:...................................................................................3
(A) Define and evaluates the process involved in Zero-based budgeting:......................3
(B) Advantage of Zero-based budgeting over the traditional Method:...........................5
(C) Introduction of such technique by the organisation in practical terms:....................7
CONCLUSION....................................................................................................................8
REFERENCES....................................................................................................................9

INTRODUCTION
Zero based budgeting is the method in which all the expenses must be validates
for the new period. It is firstly introduced during the year 1960 by Peter Pyhrr who is the
former Texas instruments accounts manager. Zero based budgeting will stats from zero
and it will justify all the expenses which is incurred by the entity during its operational
period. Zero based budgeting will enable top to bottom strategic approach so that project
which is under consideration performance can be analysed strategically (Lester, 2018).
Zero based budgeting can be created in excel too starting from entering the income or
expensed in excel workbook, then input the expected budget, then start making changes
in the budget until the final budget will becomes zero and then the final step is to monitor
the actual income or expensed accordingly. In this report the significance of zero-based
budgeting has been explained by comparing the same with traditional approach the
business concern follows. Also, this report highlights about the advantage of ZBB to the
organisation so that business processes can be improved.
TASK:
1. Cash flow forecast for the Hotel with respect to forthcoming year: -
(Covered in Excel)
2. Report on Zero Based Budgeting:
(A) Define and evaluates the process involved in Zero-based budgeting:
Zero-based Budgeting (ZBB) is defined as a method of budgeting which
requires each cost element to be specifically justified, though the activities to which the
budget relates are not being undertaken for the first time. The cost of each activity has to
be justified and without justification, the budget allowance is zero (Crowley and
Hudgins, 2022).
Zero based budgeting differs from the conventional system of budgeting because it
mainly starts from scratch or zero and not on the basis of trends or historical levels of
expenditure. In the customary budgeting system, the last year’s figures are accepted as
they are, or cut back or increases are granted. Zero based budgeting on the other
hand, starts with the premise that the budget for next period is zero so long the

demand for a function, process, project or activity is not justified for each rupee from
the first rupee spent.
Zero-based Budgeting (ZBB) is an emergent form of budgeting which arises to
overcome the limitations of incremental (traditional) budgeting system.
ZBB is an activity-based budgeting system where budgets are prepared for each activity
rather than functional department. Justification in the form of cost benefits for the
activity is required to be given. The activities are then evaluated and prioritized by
the management on the basis of factors like synchronisation with organisational
objectives, availability of funds, regulatory requirement etc (Gupta, Tyagi, and Singh,
2019).
ZBB is suitable for both corporate and non-corporate entities. In case of non- corporate
entities like Government department, local bodies, not for profit organisations, where
these entities need to justify the benefits of expenditures on social programmes like
mid-day meal, installation of street lights, provision of drinking water etc.
In case of corporate entities, ZBB is best suited for discretionary costs like research
and development cost, training programmes, advertisement etc.
synchronisation with organisational objectives, availability of funds, regulatory
requirement etc.
ZBB is suitable for both corporate and non-corporate entities. In case of non- corporate
entities like Government department, local bodies, not for profit organisations, where
these entities need to justify the benefits of expenditures on social programmes like
mid-day meal, installation of street lights, provision of drinking water etc. In case of
corporate entities, ZBB is best suited for discretionary costs like research and
development cost, training programmes, advertisement etc.
The process involved in zero based budgeting are as under: -
 Identification and description of Decision packages: Decision packages are the
programmer or activities for which decision is required to be taken. The programmer
or activities are described for technical specifications, financial impact in the form of
cost benefit analysis and other issues like environmental, regulatory, social etc.

 Evaluation of Decision packages: Once Decision packages are identified and
described, it is evaluated against factors like synchronization with organizational
objectives, availability of funds, regulatory requirement etc (Capuno, Rivadeneira,
and James, 2018).
 Ranking (Prioritization) of the Decision packages: After evaluation of the
decision packages, it is ranked on the basis priority of the activities. Because of
this prioritization feature ZBB is also known as Priority-based Budgeting.
 Allocation of resources: After ranking of the decision packages, resources
are allocated for decision packages. Budgets are prepared like it is done
first time without taking reference to previous budgets.
(B) Advantage of Zero-based budgeting over the traditional Method:
The advantage of zero-based budgeting over traditional method is as under: -
 It provides a systematic approach for the evaluation of different activities and
rank them in order of preference for the allocation of scarce resources.
 It ensures that the various functions undertaken by the organization are critical for
the achievement of its objectives and are being performed in the best possible way
(Banerjee, Cicowiez, and Vargas, 2019).
 It provides an opportunity to the management to allocate resources for various
activities only after having a thorough cost-benefit-analysis. The chances of
arbitrary cuts and enhancement are thus avoided.
The areas of wasteful expenditure can be easily identified and eliminated.
 Departmental budgets are closely linked with corporation objectives.
 The technique can also be used for the introduction and implementation of the
system of ‘management by objective.’ Thus, it cannot only be used for
fulfillment of the objectives of traditional budgeting but it can also be
used for a variety of other purposes.
Zero based budgeting is superior to traditional budgeting in the following manner:
 It provides a systematic approach for evaluation of different activities.

 It ensures that the function undertaken are critical for the achievement of the
objectives (Gössling, Humpe, and Bausch, 2020).
 It provides an opportunity for management to allocate resources to various
activities after a thorough – cost benefit analysis.
 It helps in the identification of wasteful expenditure and then their
elimination. If facilitates the close linkage of departmental budgets with
corporate objectives
 It helps in the introduction of a system of Management by Objectives.
The difference between Zero based budgeting and Traditional Budgeting are under: -
 Traditional budgeting is accounting oriented. Main stress happens to be on
previous level of expenditure. Zero-based budgeting makes a decision-
oriented approach. It is very rational in nature and requires all programs, old
and new, to compete for scarce resources.
 In tradition budgeting, some managers deliberately inflate their budget request
so that after the cuts they still get what they want. In zero-based budgeting, a
rationale analysis of budget proposals is attempted. The managers, who
unnecessarily try to inflate the budget request, are likely to be caught and
exposed. Management accords its approval only to a carefully devised result-
oriented package (Arabnejad, Bubendorfer, and Ng, 2018).
 In traditional budgeting, it is for top management to decide why a particular
amount should be spent on a particular decision unit. In Zero-based budgeting,
this responsibility is shifted from top management to the manager of decision
unit.
 Traditional budgeting makes a routine approach. Zero-based budgeting makes
a very straightforward approach and immediately spotlights the decision
packages enjoying priority over others.
 Traditional budgeting is not as clear and as responsive as zero- base- budgeting
is management focuses attention to only on decision packages, which enjoy
priority to others.

(C) Introduction of such technique by the organisation in practical terms:
The organisation can implement zero based budgeting by careful and well-planned
approach along with implementation of following steps:
 In order to implement ZBB it is important for the organisation to completely
redesign the traditional process completely. In order to start it is necessary to do
research completely having the proper idea that what steps to implement in
business process to improve it.
 It is important for the entity to find out those technology that enables then to find
out new process so that budget holders can use and embrace it in their process.
 It is important for the entity to know about their drivers such as accounts payable
of the entity must be attached with number of invoices processed in the accounts
department (Choi, Abbas, and Lee, 2018).
 Implementation of ZBB at organisational level requires proper training and
education which involves understanding about the new approach and system so
that transition can become easier for the entity.
 It is important for the business concern to decide their threshold limit to decide
the materiality of multiple expenses because not every expense of each
department needs to go through Zero Based Budgeting.
 It is important that their must be proper coordination between superior
management and staff involved in it as senior level support, proper
communication and willing to listen is a important tool.
 It is important for the management to take professional advice on regular course
of interval as learning from others and their mistakes and experience is important
to learn from them as it touches every corner of the entity and requires
fundamental changes in the organisation (Hendy, 2018).
 It is important aspect for entity that training must involves understanding of new
approach and entity’s system must be capable enough to support ZBB as the
empowering technology which bring the process more instinctive and involves les
concentrated training.
 ZBB also ensures that the management and their manager always think amount
every dollar they have spent during the period of budget as it focusses on

justification of all the operating expenses and also contributes the suggestion
which will increase the revenue of the business concern.
 In order to implement it practically at every scale of business process the entity
can compulsorily review their business process in different division and with
various programs and must prepare their estimation using the concept of ZBB so
that avoidable expenses can be sorted and removed from the structure of entity
that will ultimately save the resources and can be invested effectively somewhere
else (Wu and Chen, 2021)
CONCLUSION
From the above report the conclusion can be drawn that ZBB is the unique technique
that helps in building or improvising the business concern business process by renovating
the budget structure which newer techniques as compare to traditional method. This
report shows the brief description about the ZBB along with its advantage to organisation
and how differs from the traditional method. Further the above report highlights certain
points that how a corporation can implement such techniques practically so that their
business along with processes can be improved. Further a comparative analysis has been
conducted between zero based budgeting and traditional method so that deviations can be
analysed in both the methods accordingly. This report also includes the forecasted cash
budget an hotel industry can make on the basis on estimation of estimation of revenue
and expenses and such report regarding the estimation has been submitted to top
management of the entity so that decision can be taken accordingly. This cashflow
forecast provides the estimation that support the income statement of entity for the next
year and accordingly the expenses will be made.

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