Why Is Zero-Based Budgeting a Good Idea for Small Non-profits? - Research Paper

Introduction

Zero-based Budgeting (ZBB) is a budgeting technique which justifies all expenditures for every new period (Batts, 2019). The process of ZBB begins at zero basesand each function within the company is analyzed based on its needs and costs. Consequently, budgets are built on what is needed for the upcoming period regardless of whether the budget is either higher or lower than the previous year (Batts, 2019). Therefore, ZBB deviates from traditional budgeting in the sense that the budget for the new period in started from zero. Budgeting for non-profit organizations is experiencing challenges since the mission-driven needs surpass the available resources. However, most non-profit organizations have improved their budgeting practices, but they must step up for survival to become more successful. The paper examines the reasons why ZBB is ideal for small non-profit organizations.

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The benefits of ZBB on small non-profit organizations are budget flexibility, focused operations, lower costs, and disciplined execution ("Government Finance Officers Association", 2011).Even though ZBB has some drawbacks, but the above advantages exceed them. There are many transformations on how each non-profit organization utilizes incremental budgeting. Even those small organizations that consider the activity-based budgeting method, incrementalism forms the core process of their budgeting. In incremental budgeting, the person responsible carries out an assessment of the modest decreases or increases in the expenses and revenue lines for them to come up with a balanced budget (Batts, 2019). Even though performance budgeting is also incremental, it uses metrics when making budget increases or decreases. Incrementalism is also used in activity-based budgeting even though the people involved relegate budgetary decision making to those in lower hierarchy levels within an organization. Even though some organizations normally claim to use ZBB, the reality is they cannot afford the effort and time that is needed to judge ever program effectively every year.

The exercise of actual budgeting in most small organizations involves estimating the number of funds that are going to come during the next financial year. This helps in deciding how to spend the money (Batts, 2019). The procedure always has little to do with the incorporation of the organization's mission into financial strategy. In order to follow the technique of translating the mission of the business for the period funds, non-profit companies should use ZBB, which is the practice of deciding the specific activities that should be conducted to carry out the organizational mission, and their costs.

Zero-based budgeting does not involve either increasing or decreasing the prior year budget. Instead, it starts with a blank sheet and asks the management team to list every activity that should be conducted during the period and allocate cost to each of them ("Government Finance Officers Association", 2011). When making the necessary adjustment, they should not be in the form of 10%, but in the form of eliminating spring conferences. Since ZBB is applied across the whole organization to each department, it possesses an amazing ability to eliminate wastes as well as other nonessential activities. Moreover, it allows leaders of nonprofit companies to make specific priority decisions regarding activity to activity or by the program by program rather than estimating in simple percentages.

Budgeting for Small NGOs

NGOs have a lot of activities hey must plan on and implement. Every small NGO has a specific goal that they look to achieve. Today, most NGOs face a lot of challenges when it comes to acquiring the funds they need to run. Most of the small NGOs are bedevilled with the lack of proper strategic planning and inappropriate governance (Benett et al., 2012). For any donor to trust any NGO today, they must believe in their credibility and their ability to make optimum use of the resources issued to them. For small NGOs, donor funding is normally limited. Therefore, they need to have proper and well-planned budgets so that they can convince the potential donors to give them access to funding. Most small organizations fail because of lack of accountability and transparency (Benett et al., 2012).

Many of these small organizations normally lack sound systems that they can use to manage their finances, monitor their programs and to evaluate how the programs perform (Werker & Ahmed, 2008). Some NGOs have been accused of mismanaging their funds and inflating their budgets. Suspicions such as this damage the images of NGOs and bring a lot of questions on their transparency, making it difficult for them to get donor funds. Donor agencies have limitations on the funding they distribute (Werker & Ahmed, 2008). Therefore, NGOs must present sound budgets so that they can attract potential donors. In simple terms, budgets provide the NGOs with a platform to specify the money they need and how they are going to spend it. NGOs are not just about spending; they need to look at ways of reducing costs so that they can save money for other activities.

NGOs can find it complicated to come up with good budges that can help them to convince donors to issue them with funds. There is more need for transparency in budgeting, and this has made them important yet complicated. Over the years, budget formats have become and more difficult to maintain. Today, donor agencies are not after supporting overhead costs by organizations

Zero-Base Budgeting Approach

ZBB aims at helping organizations to stop incremental budgeting in which last year's budget is used as the starting approach. In ZBB, the starting point is set at zero. Therefore, past spending patterns are not taken into consideration (Nnoli, Adeyemi & Onuora, 2016). In order to achieve this, an organization must first be divided into smaller "decision units". The budget decision is made at the lowest level of the decision units. Managers in every decision unit are tasked with preparing a detailed evaluation and description of every activity they perform. The information provided by the managers is used to create the needed "decision-packages" that indicate the differences in the marginal levels of spending that would show the varying levels of cost and effort (Ibrahim, Ashigar, Bello & Mamuda, 2019). At least three decision packages are needed for every decision unit.

ZBB is a detailed process that requires the involvement of low-level managers such as line managers. This is where ZBB differs a lot from other approaches. This is where ZBB varies a lot from other approaches. Every division in an organization is charged with creating three to ten "decision-packages" together with the supporting information for every decision package ("Government Finance Officers Association", 2011). The decision packages from the different divisions are grouped and ranked. After the ranking, the packages are used by the central budget authority as the ground for making their budget allocations. Every department submits its rankings, and these would be used to make budgetary decisions.

ZBB, therefore, offers a comprehensive way of cutting the budget. Using ZBB, the small NGOs can make different cuts to different services using the value an organization believes they can derive from them. Therefore, using ZBB, budgets can move away from the use of "across-the-board" cuts by ensuring the values of different services are differentiated (Snell, 2012). Additionally, this approach can provide the management with a detailed insight into the operations of every department.

Potential Benefits of ZBB for Small NGOs

For all those organizations that want to growth by releasing capital when they improve their cost management, ZBB can help in cost reduction and adding more value in terms of ensuring operational efficiency (Ibrahim et al., 2019). Therefore, ZBB can encourage small NGOs to only engage in those programs that they consider efficient and necessary. Small NGOs need transparency and efficiency, and ZBB can prove beneficial to them. The NGOs can be forced to prioritize every program actively. This would help to improve efficiency by encourages the stakeholders within the NGOs to work together when analyzing their operations for maximum benefit. The NGOs can, therefore, be encouraged to know their priorities and understand their missions. This way, they would be able to align their resource allocation with strategic goals. Most important, the NGOs would be more appealing to the stakeholders because they would be seen as being transparent in the way they handle their finances when they use ZBB.

ZBB can also help these organizations to confront resource allocation and conventional thinking by ensuring that they challenge every line item and the assumptions made (Ibrahim et al., 2019). Most organizations are today using ZBB to help them in increasing their savings so that they can realize maximum benefits. These organizations would find ZBB very useful because it aligned to the overall strategy and the resultant budget is normally well justified. For most organizations, cooperation and coordination among the various departments are important. Using ZBB, different departments within an organization would be able to cooperate well. Moreover, organizations would have the ability to reduce their costs by ensuring that the resultant budget is relatively stable ("Government Finance Officers Association", 2011). This would help then to avoid unforeseen budget increases thereby giving them the ability to save.

On the other hand, it is important for these organizations to use ZBB cautiously because it can be time-consuming, complex, and costly (Nnoli, Adeyemi & Onuora, 2016). This is because budgets often need to be started from scratch every year. Small NGOs may have limited funding. For this reason, using ZBB would be cost-prohibitive for them. Additionally, it is a risky method to follow when there is uncertainty on potential savings that can be realized (Nnoli et al., 2016). In order to use this approach, there is a need for certainty on savings. In general, ZBB requires more resources and the people involved must have specialist training.

With ZBB, there is transparency in the trade-offs between outputs and inputs. Also, the changes in what every department will provide relative to the money issued would be more transparent (Snell, 2012). With ZBB, it would be possible to introduce a lot of budget reforms such as centralized budget decision-making. It would be possible to precisely understand the budget requests and enable the people responsible for making better distinctions on the things they will fund and the ones that they will leave out. Small NGOs might also want to re-allocate resources effectively within various departments. Most of the people that use ZBB are normally enthused about the role it can play when it comes to reallocating resources from low priority tasks to the high priority ones. For ZBB to succeed, there must be working performance measures put in place.

Challenges and Risks of ZBB

Through ZBB, organizations have the opportunity to make improvements and cut costs. However, to complete a complete cycle of ZBB, organizations can face a lot of risks and challenges. For some managers, there are a lot of threats when it comes to prioritizing program needs. Additionally, departments that have no tangible outputs may find it difficult to complete a whole ZBB cycle. The ZBB process in itself can be costly and time-consuming when compared with the traditional budgeting methodologies. Using ZBB needs additional time and the people involved must be specially trained.

When an organization is unable to train its people effectively, the proc...