Running head: ZERO BASED BUDGETS 1

Zero Based Budgets

Mario S. Mendoza

Financial and Managerial Accounting

MNC1048A

Hong Zhao

December 20, 2010

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Zero Based Budgets

The Board of Directors at Windsor Regional Hospital have seen substantial growth combined

with increasing demands for service, debt and costs that have caused them to reconsider their

budget process. The board has chosen a new direction in the way the hospital responds to all

demands through a zero-based budget (ZZB) process. Winsor Memorial can implement a ZBB

process in a few easy steps. The first step, “…is to develop decision packages which involve

analyzing and describing each discrete activity… (Carter, 1977)”. Next, the decision packages

are ranked using the five essential elements according to Peter A. Pyhrr the developer of zero-

based budgets. Once a zero-based budget is successfully implemented, the board at Windsor

can expect to see benefits in the efficient allocation of resources, waste elimination (sacred cows)

and eliminates inflated budgets.

In developing a ZBB for Windsor Regional Hospital, department managers should

understand that the status quo for budgeting is out the door and that a new thought process must

prevail. In a ZBB, the budget is not built based off last year’s spending patterns or total budget.

Instead, every item on the budget must be analyzed, re-justified and designed into a specific

package on an annual basis. The department managers must understand that the burden of proof

for any money given to their budget relies on specific input. With a zero-based budget, “…a

manager is required to evaluate many programs and activities and make some very difficult

decisions involving policy, programs, personnel, etc. (Carter, 1977)”.

In the development of the decision packages, Winsor should analyze all programs from a

revenue stream. According to Mr. Pyhrr, evaluating the package should take into consideration

four measures. The first step in building the decision packages is to evaluate all current
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programs, departments, hospitals, clinics, and initiatives. The focus of the evaluation should be

targeted to its effectiveness, cost and the likely hood that it would benefit Windsor in the

following year.

Once the programs are evaluated, Winsor should move to the second step in Pyhrr’s ZBB

model. In the second step Winsor should look at consolidating, eliminating or replacing

programs that are ineffective or obsolete. In nature this is clearly visible in a tree. Branches that

don’t get the right amount of sunlight either alter their course or ultimately die. In the same

way, any program or organization with-in the Windsor family that is ineffective or outdated

should be re-directed or eliminated.

The third step in the development of packages is to develop goals or objectives for each

organization or program. In order to justify the existence of any program, it must have a mission

or goal. By developing a mission or goal, the organization has a purpose for existing.

Additionally, the goals or objectives must be viable. While it is great to have noble goals, few

organizations will continue to pour money into programs that are largely ineffective regardless of

the goal.

The fourth and final step in developing the decision packages for Windsor is getting every

department manager to be involved in the policy formation that will govern his/her department.

These policies should encompasses the finances, activates that are associated with each cost, and

any other situations that will make the organization successful. “The manager identifies any

negotiating points or “trade-offs” between partially or completely accomplishing the desired or

established goals as they relate to cost (Carter, 1977)”. In the last part of this step, the manager

has to create a realistic budget for his department in which the organization can operate while

making a positive return to the organization.

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The second step in the ZZB is to rank all of the decision packages based on the five essential

elements according to Pyhrr. The five essential elements in this step are (1) purpose, (2)

consequences, (3) measures of performance, (4) alternatives and the (5) costs and benefits.

While it is never easy to make cuts or eliminate jobs in any depart, the strength of the ranking for

all departments will ultimately decide the priority. So, it is in the best interest of all department

managers to do a thorough job in ranking the decision packages.

First, the purpose of each department at Winsor should detail out the goals for the

organization in detail. They goals should be obtainable and measurable otherwise they are just

happy thoughts or pie in the sky. Additionally, the purpose should also list objectives that the

department can use as a measuring stick or gauge to measure success or failure. They need to

know whether they are on track to achieving their goals as a department.

In the second step of the ranking process, department manages must outline the consequences

for not performing the action in a specific program. One example is the consequences of

eliminating a blood drive program with the local community. The department must give realistic

outcomes for eliminating the blood drive program and its impact on the community and the

hospital.

The third step is to develop the performance measures for the organization. These

performance measures should be realistic and obtainable. The goals should be easily measured

and understood. Without performance measures, the organization is flying blindly and will soon

lose sight of its target.

The fourth step in the ranking process is to list and define any alternatives to the program.

While the program may have been profitable for the hospital, there could be other alternatives.

One example is a leasing program vs. a fully staffed shop with qualified mechanics to maintain
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all of the hospital’s vehicles. In this scenario, the hospital must analyze their current process

and investigate other alternatives based off market analysis, benchmarking and creative thinking.

The last and final step in the ranking process for the decision packages is the costs and

benefits analysis. The analysis should be clear in how much the program will cost versus the

intended benefit. Additionally, just because the program does not make money, it does not mean

that the program will not be viable. Community programs rarely bring in money but the hospital

gains publicity and good will through positive marketing. Having a positive image in the

community is incredibly important and these programs should not be automatically ruled out.

Once a zero-based budget is successfully implemented, the board at Windsor can expect to

see benefits in the efficient allocation of resources, waste elimination (sacred cows) and

eliminates inflated budgets. These improvements will put Winsor Regional Hospital in a strong

financial position while providing quality health care.

One of the first benefits with implementing a ZBB is the efficient allocation of the resources.

In this type of budget, resources are directed to programs or departments that will make the most

money or give the hospital a strategic advantage in the health care arena. The budget would also

keep the board of directors informed about all the financial decisions and where the money will

be spent on a monthly basis.

The second most important benefit is the reduction of wasted dollars through “sacred cow

programs”. The easiest and most obvious “sacred cow” in America is the Social Security for

seniors. Anytime a politician talks or accuses someone of wanting to cut benefits, everyone gets

up in arms and is instantly inflamed. While it is true that a large portion of the U.S. population is

against reducing benefits, it may be necessary at some point in time to cut the benefits for the
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good of the country. In a hospital situation, a sacred cow may be the famous cardiac center or a

world renowned cancer center.

The third and most immediate benefit from a ZBB is the elimination of inflated budgets.

“Unlike traditional budgeting techniques that require administrators to validate only increases

over the previous fiscal-year budget, zero-based budgeting starts afresh; without making any

references to the earlier stages of expenditure (Talwar, 2004)”. The budgets will be evaluated

annually and if implemented properly will reduce the sense of entitlement that any department

may have. In order to receive money in a budget, expenses must first be justified.

In summary Windsor Regional Hospital will benefit from zero-based budgets if implement

correctly. In this process, “…zero-based budgeting will combine the planning phase with the

budgeting phase of an agency (Carter, 1977)”. Managers will have to justify all the expenses of

each department through the prism of effectiveness and profitability. With an effective ranking

of all decisions, Windsor will be able to reduce their operating costs and become an industry

leader.

References
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Carter, W. H., & Meenach, L. (1977). Zero-Based Budgeting and Program Evaluation. Journal

of Rehabilitation, 43(1), Retrieved from EBSCOhost.

Hughes, A. (2010). Boosting Profits. Black Enterprise, 41(2), 52-53. Retrieved from

EBSCOhost.

Talwar, N. (2004). What is Zero-based Budgeting?. UN Chronicle, pp. 41 (1), 29. Retrieved

from EBSCOhost.

Zero-based budgeting meets; Carter explains policy. (1977). Library Journal, 102(4), 437.

Retrieved from EBSCOhost.