Zero-based budgeting

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified and approved for each new period. Developed by Peter Pyhrr in the 1970s, zero-based budgeting starts from a 'zero base' at the beginning of every budget period, analyzing needs and costs of every function within an organization and allocating funds accordingly, regardless of how much money has previously been budgeted to any given line item. Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified and approved for each new period. Developed by Peter Pyhrr in the 1970s, zero-based budgeting starts from a 'zero base' at the beginning of every budget period, analyzing needs and costs of every function within an organization and allocating funds accordingly, regardless of how much money has previously been budgeted to any given line item. As an accounting manager for Texas Instruments, Peter Pyrrh created zero-based budgeting to facilitate the incorporation of top-level strategic objectives into the budgeting process by tying them to specific functional areas within the organization. Under his system, costs are grouped and measured against previous results and current expectations, enabling management to allocate funds by current need instead of by historical expenditures. Author of Zero Based Budgeting: A Practical Management Tool for Evaluating Expenses, Pyhrr was appointed by then-Georgia governor Jimmy Carter to manage the state's budgetary process. Zero-based budgeting in the public sector versus the private sector is a different process. 'The use of ZBB in the private sector has been limited primarily to administrative overhead activities (i.e. administrative expenses needed to maintain the organization).:51 In the United States Zero-based budgeting was developed in 1969 at Texas Instrument Inc. Jimmy Carter, then Governor of Georgia, was the first to adopt the process of zero-base into the government for the preparation of the fiscal of 1973 budget. Three years later, sponsored by the President and Congress the federal government for the first time implemented zero-base budgeting in The Government Economy and Spending Reform act of 1976. President Carter later required the adoption of ZBB by the federal government during the late 1970s. 'Zero-Base Budgeting (ZBB) was an executive branch budget formulation process introduced into the federal government in 1977. Its main focus was on optimizing accomplishments available at alternative budgetary levels. Under ZBB agencies were expected to set priorities based on the program results that could be achieved at alternative spending levels, one of which was to be below current funding.' For the most part in United States government, the main users of ZBB are the legislative, executive, and the agency. The legislative includes the congress, state legislature, and city council, and they require more summarization and focusing on public priorities and objectives. Agencies include the agency director and department managers and they require more detailed information and focus on program implementation and efficiency. Lastly, the executive includes the President, governors, mayor/city manager and they focus on the needs of the legislature and agency. Although the legislative, the agency, and the executive have different focuses they all have to address two standard questions: According to Peter Sarant, the former director of management analysis training for the US Civil Service Commission during the Carter ZBB implementation effort, 'ZBB means 'different things to different people'.' Some definitions imply that zero-based budgeting is the act of starting budgets from scratch or requiring each program or activity to be justified from the ground up. This is not true; the acronym ZBB is a misnomer. ZBB is a misnomer because in many large agencies a complete zero-base review of all program elements during one budget period is not feasible; it would result in excessive paperwork and be an almost impossible task if implemented.':3In many respects the 'common misunderstanding' of ZBB noted above resembles a 'sunset review' process more than a traditional public sector ZBB process.