A budget is a quantitative economic plan in respect of a particular period. Therefore, the budgeting process is a crucial part in the management, planning, coordination and control of any organization, which intends to achieve its organization goals (Irons, 2010). Zero Based Budgeting is an approach to budgeting that begins from the premise that no costs are factored into the plans for the upcoming budget period just because these plans are outlined in the costs or activities for the current or were included in the previous periods.
Zero-based budgeting was introduced in the 1960s and has been one of the major drivers in attempting to find budgeting models that serves the purposes and objectives of the organization. Zero-based budgeting entails the preparation of operating budgets on the assumption that the organization is beginning out a new in the fresh planning period (CIPFA, 2006). Moreover, zero-based budgeting is most efficiently where the events involved are mainly flexible in nature and conveniently to budget heads like repairs, maintenance or equipment costs (CIPFA, 2006).
Zero based budgeting questions set assumptions and offers a tool for methodical reviewing, reprioritizing, and withdrawing from long-term actions that are misaligned with an organization’s objectives. Successful use of zero-based budgeting depends on the effective involvement of all executive managers in the budgeting process. The procedure needs specifications of least levels of service provision, the present level and the incremental level.
Benefits of the action, substitute courses of action, how to assess performance, and the penalties of not performing the activity are considered in the analysis (Research and Library Services, 2010). All activities of the organisation are re-evaluated yearly from the zero bases, since zero-based budgeting does not assume the pervious year’s allocation of resources as suitable for the present year thus ineffective and obsolete activities are eliminated, and inefficient spending is restrained.
For zero-based budgeting to be used in practice, bottom-up approach is encouraged in budgeting and must encourage a querying approach among managers. Zero based budgeting reacts to variation in the business environment from one year to the next and hence results in a more effective allocation of resources (Irons, 2010). 1. 1 Research statement Zero-based budgeting has been in the business sector for several decades and evolves around the concept of resource allocation. The initiator of zero budgeting is Peter Pyhrr who developed the concept in 1970’s.
The concept soon found its way in application by the United States of America in its budgeting processes. Zero based budgeting responds to changes in the business environment from one year to the next, which results in a more effective allocation of resources with these changes. The incremental budgeting method is the traditional budgeting technique whereby the budget is set up by taking the present period’s budget or real performance as a base, with incremental amounts added for the fresh budget period. Adjustments for things like inflation, or planned rises in sales prices and costs are the incremental amounts.
One of the disheartening facts is that incremental budgeting does not allow for inflation. In addition, incremental budgeting has assumptions that all present activities and costs are still required without scrutinizing them in detail and justifying their allocation of resources and their contribution to organizational goals. Managers may result in spending money for the sake of it, keeping in mind that if these managers do not spend the money in the current year, the managers may not be allocated money the following year.
Moreover, performance goals are frequently unchallenging because these targets are heavily based on past performance with some kind of token raise. Hence, managers are not persuaded to challenge themselves in undertaking new activities and avoid inefficiencies from previous periods from being carried forward into upcoming periods (Irons, 2010). 1. 2 Purpose of the study The study had the purpose of investigating the potential of using zero based budgeting in the public sector with special reference to general budgeting in the state of Qatar.
The study identified both advantages and disadvantages of zero-based budgeting. The advantages are as follows. All activities of the corporate are re-evaluated yearly from the zero bases because zero-based budgeting does not have an assumption that previous year’s allocation of resources is suitable for the current year. For zero-based budgeting to be utilised in practice, bottom-up approach to budgeting is encouraged as it promotes motivation of employees given its participatory nature.
In addition, zero-based budgeting promotes querying approach among managers and counters to changes in the business environment from one year to the next. Zero based budgeting results in an extra effective allocation of resources (Irons, 2010). On the other hand, disadvantages are as follows. There is lack of essential skills by departmental managers to construct decision packages, this leads to waste of time, and huge amounts of money are spent through training of managers.
In addition the number of activities will be so huge that the quantity of paperwork produced from zero based budgeting will be out of hand if the organisation is large. Since many activities cannot be contrasted on the base of entirely quantitative measures, ranking the packages can be difficult. The procedure of classifying decision packages and establishing their intention, costs and benefits is extremely time-wasting and costly. Managers may be unable to respond to adjustments that take place during the year since the budgeting was done without flexibility of alterations.
Finally, organisation’s management information systems may not be able to avail the required information for proper analysis (Irons, 2010). 1. 3 Research objectives 1. To determine the most difficulties of using zero budget 2. To determine how decision makers affect the budget 3. To find out whether implementing zero budgeting will meet the objective of budgeting and achieve the perfect budgeting where all benefits could be absorbed 4. To determine the costs and benefits of zero based budgeting 1. 4 Research questions 1. Why are zero budgets the most used in the public sector?
2. What are the advantages of zero budgets? 3. What are the disadvantages of using zero budgets? 4. Do you think zero budgets are the best solution for public sector? 1. 5 Research Hypothesis H1: The zero based budgeting is in overall efficient in resource allocation H2: Zero based budgeting is more suitable for public sector because it improves accountability. H3: Proper allocation of resources in the public sectors improves the performance of the sector. H4: Zero based budgeting ensures efficient allocation of resources in the public sector 1.
6 The scope and limitation of study The study covers a narrow scope of the potential of using zero based budgeting in the public sector in reference to general budgeting in the state of Qatar. The study also compares zero based budgeting with the incremental budgeting techniques. The study has limitation of the complexity in achieving some of the study objectives and complete validation of the hypothesis was very sophisticated. The study realised a weak methodology in terms of primary data collection, hence a great reliance on secondary data, which was accessible.
Just as both forms of data were important in this research, failure to explore the primary data resulted into somewhat weak results. The weakness of the methodology also surfaced during data testing and verification to ensure validity of the hypotheses. 1. 7 The significance of the study Realising the potential of using zero based budgeting in the public sector will provide several significances to the government and society, among other sectors. The Qatar government will apply the findings to streamline their budgeting system, where the allocation of resources is the major concern.
Since Qatar is among the leading countries in per capita income in the world, poor budgeting techniques may tumble their sustainable developments. Therefore, the government will find the results significant in designing appropriate responsive budgeting strategies to reduce the likelihood of tumbling and hence the achievement of sustainable and equitable development using zero based budgeting in the country. The study will be significant to the governmental corporations in that their centre of operation to achieve efficiency in the utilisation of resources will be enhanced.
Many departmental managers will be motivated with incentives that go with zero based budgeting and this will enable these managers to use the resources efficiently to the purpose intended. The community will use the finding to evaluate the government performance when using zero based budgeting for its resources. The study is significant to the United Nations and the World Bank, which will use the findings to evaluate the progress of the government performance after using zero, based budgeting in allocating its resources.
The learning institutions will use the study to identify the benefits and costs of zero based budgeting in the public sector. The researchers will use the study findings to advance their research in the subject matter. The development partners will use the study to advice the government adequately on the use of zero based budgeting for efficient resource allocation. 2. 0 Literature review 2. 1 Objectives of budgeting Budgets are supposed to fulfil one or more of the following objectives. Firstly the budget should map out a road to be travelled in fulfilling the organization objectives detailing all the steps to be taken.
Secondly the budget should ensure the attainment of the objective by placing planning control framework over the steps to be taken. Thirdly the budget should spell out the connections between the parts of the organization’s plan to coordinate the activities. Fourthly the budget should be used as a means by which the management plainly informs the staff and the public at large what the organization will be doing. Fifthly the budget acts as a managerial instruction by laying out the requirements of an organization.
Sixthly the budget is an authorization to take action within specified limits performing a delegating function. Seventhly the budget can act as a motivational tool to encourage managers to perform within targeted limits. Eighthly the budget provides a benchmark against which actual performance is measured against. Ninthly a well designed budget is a useful tool in evaluating the consequences of proposed changes in actions by tracking the effect of any change throughout the organisation (Harper, 1995, pp 321-322)
Economists have come up with a variety of tools and paradigms for considering the allocation of resources in the public sector. This covers the investigation of when and how the public sector should get involved in worsening markets enabling them to measure marginal utility, cost effectiveness, allocative efficiency and cost benefit analysis (Harper, 1995, pp 321-322) 2. 2 Types of budgets There are quite a number of budgets, which vary depending on the focus they each take. To start with there is incremental budgeting (IB) which focuses on the increase of allocation in resources for the previous period.
Furthermore there is zero-based budgeting (ZBB) which resets and starts from zero without consideration of the previous allocation leading to competitive resource allocation depending on the benefits derived from each and every proposed and undertaken activity. Other types of budgets include priority-based budgeting, planning programming budgeting, performance based budgeting, participatory budgeting and activity based budgeting among others which are modifications of Incremental budgeting and Zero based budgeting (Harper 1995 pp 321-322).
2. 2. 1 Incremental budgeting An incremental budget is whereby the previous year’s budget for a department or division is carried forward for the next annual budget. In incremental budgeting, the budget is adjusted for known factors such as new legislative requirements, additional resources, service developments, anticipated price and wage inflation. Therefore the process is mainly concerned with the incremental or minor adjustments to the current budgeted allowance.
Chartered Institute for Public Finance and Accounting (CIPFA) asserts that a key characteristic of the approach is that the incremental budget preparation is a process of negotiation and compromise and therefore it is based on a fundamentally different view of decision making than more rational approaches. In incremental budgeting negotiated settlements between interested parties require readiness to give and take because if agreement breaks down and compromise cannot be reached, the incremental process becomes worthless.
According to CIPFA, use of this model, therefore, requires a relatively stable form of representative government. The process of incremental budgeting is straightforward and the key stages are establishing the base, deciding what is committed expenditure and then making adjustments to reflect unavoidable changes, such as annual effects of staff appointments, annual effects of the capital programme, salary increments, non-recurring items which should be removed. External factors such as changes in legislation or government funding regimes, changes in price levels for labour, goods and services are also considered in the adjustment.
Additionally the process involves adding to the implications of the development budget to reflect proposed savings and growth. Finally the process involves combining departmental requests and generating the new master budget. 2. 2. 1. 1 Advantages of incremental budgeting IB is easily understood due to its exposition, making of marginal changes and securing of agreement through negotiation. Incremental budgeting is administratively straightforward, cheap and hence it allows policy makers to concentrate on the key areas of change.
Concerned parties in government or management are not required to study long and detailed budgetary documents and it is particularly useful where outputs are difficult to define/quantify and it is stable and therefore changes are gradual. 2. 2. 1. 2 Disadvantages of incremental budgeting IB is backward looking in that is its focus is more on previous budget than future operational requirements and objectives. Secondly it does not allow for overall performance overview therefore not assisting managers identifying budgetary inefficiencies.
Fourthly it is often fortified by data or service provision, which is no longer relevant or is inconsistent with new priorities thus encouraging systemic inertia and ‘empire building’. Finally incremental budgeting tends to be reactive rather than proactive and it assumes existing budget lines are relevant and satisfactory. 2. 2. 2 Zero-based budgeting Zero-based budgeting (ZBB) starts from the basis that no budget lines should be carried forward from one period to the next instead expenditures that are included in the budget must be considered and justified.
Zero-based budgeting in its unadulterated form involves the planning of functional budgets on the supposition that the organisation is starting out once more in the new planning phase (CIPFA, 2006). Therefore the allotment of resources will be based only on the merits of their policy goals and not as per the preceding budgetary allotments (Financial Web, 2010). ZBB relies on the participation of all senior managers requiring the organisational objectives to be plainly stated.
Therefore ZBB is more concerned on how the delivery of service will be done with the available money given the objectives, the different alternatives of achieving it and the budget requirements for each alternative (Northern Ireland Assembly, Research and Library Service, (NIARLS) 2010, p. 7). In addition ZBB process requires that specification of minimum levels of service provision, the current level, and an ‘incremental’ level be outlined between the minimum and the existing or advancement over the existing level.
After each alternative of delivering quality service is analyzed and justified a request for resources is then forwarded to the relevant authorities. CIPFA (2006) asserted that the investigation should extend to considering the benefits of the activity, option courses of action, how to measure performance and the consequences of not performing the activity. Then the identified activities are then ordered according to priority showing where the resources will be focussed. 2. 2. 2. 1 Objectives of Zero-Based Budgeting The aim of ZBB is to outline all budgetary requirements in an all-inclusive, reasonable and complete manner.
Likewise ZBB aspires at questioning the previously-set assumptions, assessing them and judging their relevance. Additionally ZBB intends to act as a tool for organized investigation, assessment and allocation of resources to any area that desires attention focussing on channelling funds to prioritized areas. Furthermore ZBB aim is to measure the performance and answerability for every budget request and justifying the costs and purpose in every budget cycle. In addition ZBB intends to relate costs to the missions or objectives of the department and hence choosing the best from among the many developed ‘Decision Packages’ for every target.
Another crucial aim of ZBB is to identify alternatives in a project or in its outsourcing such as whether the operation will be centralized or decentralized. ZBB aims at allotting the responsibility of each project to the manager and the team and this unearths every opportunity for in-depth operation review and making recommendations and changes for optimal completion of every project. Finally ZBB aspires at increasing staff motivation by making them participants in the budgeting process. 2. 2. 2. 2 Advantages of zero-based budgeting
ZBB allows questioning of the inherited position and challenge to the status quo thus countering empire building. Moreover ZBB focuses the budget closely on objectives and outcomes by actively involving operational managers rather than handing them down a budget. In addition, ZBB can be adaptive to changes in the business circumstances and priorities and therefore can lead to better resource allocation. In ZBB there is assured efficiency in allocation of funds since it is based on needs and benefits and so avoids unnecessary expense.
In addition ZBB improves the services by utilizing cost-effective methods and imposes a restraining influence during allocation of funds thus containing any inflation. Likewise ZBB controls the entitlement mentality of departments by demanding justification for each and every allotment. In ZBB process budgetary allotments and discussions are meaningful and purposeful as they yearn to deliver service efficiently, weed out stale, ineffective and counterproductive activities and only fund those that are productive. 2. 2. 2. 3 Disadvantages of zero-based budgeting
ZBB is more time consuming than incremental budgeting in that it is overly bureaucratic and produces excessive paperwork. Moreover in ZBB there is need for specialized skills and training, which sometimes lack within the budget preparing department. Additionally in ZBB difficulties can arise in the identification of suitable performance measures and decision and/or prioritization criteria and also in instances where there is insufficient information ranking could also be problematic. Additionally in ZBB if the specification of a minimum level of service provision is below the current level this may demotivate managers.
Besides in ZBB the questioning of the inherited position can be seen as threatening to organisations and their people so careful management of the people element is essential and should be enhanced. Likewise in ZBB it may be difficult to cost and estimate resource requirements for new options different from the current practice giving rise to greater uncertainty. Sometimes ZBB sounds too far-reaching and so consensus is difficult to obtain. Too many decision packages may be needed for a very large organization thus making the process very slow.
Largely ZBB needs commitment and professional attitude to ensure proper implementation and the justifying of every expense in ZBB may not be feasible or practical in some organizations. Therefore in organizations using ZBB departments like Research & Development may find cash-crunch crippling the department’s activities. To undertake ZBB all managers and staff should be educated and trained about concepts of application of ZBB thus leading to extra expenses. 2. 2. 3 The use of quantitative technique in budgeting There are several techniques available to support in the preparation of a budget.
Majority of these methods address projecting and planning issues by quantifying costs, quantifying time frame and duration and people involved to produce given number of units. These techniques are the high-low method, least square squares linear regression, time series analysis and learning curves. The high-low cost method is seen in the framework of untying fixed and variable costs. The method considers the costs incurred at the lowest and the highest outputs and any rise in costs are purely with the result of extra variable costs. This method is fast but crude (ACCA, 2010).
The linear regression is a goal oriented way of fitting the best possible straight line through any sets of points (ACCA, 2010). This method always results to a straight line and work with any set of points. Coefficient of correlation (r) is calculated. The regression analysis and coefficient of correlation formulae are given below where x is the independent variable and variable and y is the dependent variable. This implies that change in x should cause a change in y. Even with a good coefficient of correlation, linear regression is based on very few points making the method unreliable.
Time series analysis is more adaptable and identifies that the following effects present. These are trend, seasonal variation, clical variations and random effects. Trends are underlying smooth increase or decline of an amount as time passes. Seasonal variation is cycles of variations recurring in less than a year. Clical variations are cycles of variations recurring in more than a year, generally, the long term trade cycle. Random effects are non-recurring and non-predictive variations. Times series analysis is more tedious and more sophisticated than linear regression but neither of the methods assures an accurate answer (ACCA, 2010).
Learning curves is extremely manual and greatly complex with the highest opportunity for learning by considering that the cumulative average time taken to finish a task drops by a particular proportion each time the cumulative output doubles. Learning is simple to tabulate by doubling cumulative output and using the learning curve factor to the collective average time. Learning curve effect and its impacts on time/unit change is important for costing, pricing and scheduling work. Learning is specifically significant in the early stages of production and less in later stages.
Improvement ceases because of limit to human dexterity, some procedures cannot be quickened up any more and fresh, inexperienced employees will replace experienced ones from time to time (ACCA, 2010). 2. 3 Comparison between Incremental budgeting and Zero based budgeting Incremental budgeting takes into account the previous year’s budget while ZBB starts the budgeting process afresh by setting departmental expenditure to zero. Zero-based budgeting (ZBB) starts from the basis that no budget lines should be carried forward from one period to the next instead all expenditure that is included in the budget must be considered and justified.
Zero-based budgeting in its unadulterated form involves the planning of functional budgets on the supposition that the organisation is starting out once more in the new planning phase making it very tedious and time consuming while incremental budgeting is easy to prepare and to understand and consumes little time (CIPFA, 2006). In ZBB the allotment of resources is based only on the merits of their policy goals and not as per the preceding budgetary allotments while in incremental budgeting the allotment of resources is done as per the previous period plus a marginal percentage increase (Financial Web, 2010).
ZBB relies on the active participation of all senior managers requiring the organisational objectives to be plainly stated while incremental budgeting requires organisational objectives to be stated and resources allocated. ZBB is more concerned on how the delivery of service will be done with the available money given the objectives and the different alternatives of achieving it while incremental budgeting is concerned on how the available money can be used to deliver services (Northern Ireland Assembly, Research and Library Service, (NIARLS) 2010, p. 7).
ZBB process requires that specification of minimum levels of service provision, the current level, and an ‘incremental’ level be outlined between the minimum and the existing or advancement over the existing level while incremental budgeting process does not require the specifications of the current levels of service provision. In ZBB after each alternative of delivering quality service is analyzed and justified a request for resources is then forwarded to the relevant authorities while in incremental budgeting no justification is needed during the request of resources.
CIPFA (2006) assertion in ZBB that the investigation should extend to considering the benefits of the activity, option courses of action, how to measure performance and the consequences of not performing the activity is absent in incremental budgeting. In ZBB the identified activities are ordered according to priority showing where the resources will be focussed while in incremental budgeting the no ranking is necessary. 2. 4 General budgeting in the public sector around the world
The government sector commonly known as the public sector, from both revenue and expenditure sides is the most important player and major component of the countries economy. However, in spite of the importance of the government sector, the budget, which is the main document that highlights the data important to the government sector activities with regard to expenditure and revenue, does not demonstrate the information that suits the significance of the budget and its major components. For instance in Saudi Arabia the budget process is not disclosed neither are there explanation of how expenditure figures are arrived at disclosed.
The budget also does not show how revenues, the major component of government revenues, have been estimated since the budget does not include any information about oil production, sales or prices used for estimation (Al-Dukheil 2010). One of the chronic problems in the context of government administration behaviour in the public sector is complete spending amounts allocated to a ministry without refunding the balance to the public treasury a factor that greatly affects the following year’s allocations to that ministry and or department.
Another chronic problem of government administration behaviour is the tendency of those in charge of public funds and government policies to enlarge spending with the first news demonstrating probable increase in the projected revenues (Al-Dukheil 2010). Al-Dukheil (2010) advises that sound economic justification and cost and benefit scrutiny should form an integral part of the decision making process when evaluating alternatives regarding to public spending a key idea in Zero based budgeting.
The details about the projects that are to be undertaken help to determine whether the projects are strongly related to economic development that increases per capita productivity and productivity of the economy as a whole increasing per capita income and welfare or not (Al-Dukheil, 2010). 3. 0 Case study on the general budgeting in the state of Qatar Qatar as a state has a third of leading reserves of natural gas globally. In addition, the country is one of the leading in per capita GDP in the world of about $30,000 with multi-billion dollar projects in several sectors in the years to come.
Qatar is a pro-American business environment and has strengthened its relationship with the United States by having business-friendly commercial processes and political stability. The country embarked on economic modernization and political stability by opening to global market. The country is a member of OPEC and the Gulf Cooperation Council (GCC). Qatar’s economic growth prospective is spectacular. In 2003 and 2004 the country’s economy grew by 8. 8% and 7.
5% respectively and more significant is the government’s strategy to use its resources to generate much wealth by varying the economic base of the country further than hydrocarbons, a policy that can be made possible by the use of principles of zero based budgeting. This is because Qatar’s economy is supported by revenues from natural gas and oil resources. 14 million metric tones of natural gas are exported by Qatar and the country has approximately over 900,000 billion cubic feet of natural gas, which is equivalent to 6% of the world’s total reserves (Wallace, 2005).
The country produces about 1 million barrels of oil per day with approximately 14 billion barrels of oil reserves. The country is trying hard to make the country attractive for trade and investment by carrying out economic reform, transparency, and business friendly policies, which are suitable for zero, based budgeting. This is because zero based budgeting has overall efficiency in resource allocation and utilization than traditional and any other technique of budgeting.