Tag: budgeting

The Zero-based budgeting concept was advocated in 1924 by British budget authority Edward Hilton Young. He advocated complete justification of every item requested in a budget. The ZBB concept became more popular only in 1970s. In 1960s, ZBB was formally initiated in the Department of Agriculture of the USA.

First and foremost step involved in the zero-based budgeting process is, identifying the decision unit. A decision unit can be a single activity or a cluster of activities which can be independently and meaningfully identified.

The limitations of ZBB, which arise due to certain operational problems, are as follows:

1. Implementation Problems:

The concerned managers should continue in the same decision units. If they are transferred frequently to other departments, it may lead to waste of time and resources in training and developing new managers.

2. Formulation Problems:

Considerable problems may arise while formulating decision packages. 

3. Ranking Problems:

Problems may arise in ranking of decision packages. General Managers may like to continue their favourable projects for the reasons best known to them. Ranking may also become difficult when there are a large number of decision packages, particularly in a multi-product manufacturing firm.

There are any number of ways to rank decision packages managers will no doubt employ various methods of ranking. The main point is that the ranking of decision packages is an important process of ZBB. An important element of the ZBB process is that it forces prioritization of all programs and activities.

Operating budgets are typically assembled on a monthly or quarterly basis and cover a one-year period.

CONTROLLING AND MONITORING

This is the last step in preparing zero-based budgeting. In this step, decision packages are monitored and evaluated for their performance and output. Measuring the performance of the decision packages helps the management to understand whether the allocation of resources is done accurately or not.

A rolling budget is continually updated to add a new budget period as the most recent budget period is completed. Thus, the rolling budget involves the incremental extension of the existing budget model. By doing so, a business always has a budget that extends one year into the future.

Forecasting involves identification of past trend and projecting it into the future. It is based on the all the past figures, historical data ,existing data and expected events.

Fund flow statement shows that the flow of funds during the year. The meaning of funf in fund flow statement is net working capital.

The following points highlight the five main motives for holding cash balances in a firm. The motives are: 1. Transaction Motive