All areas of the public sector are faced with the prospect of making large, radical cost reductions, between 25% and 40% of their current budgets. Clearly the days of the traditional method of budgeting which entailed taking last year’s costs and adding 2% or whichever factor was agreed are long gone.

Many are therefore turning to the concept of Zero Based Budgeting (ZBB) in order to ascertain how much they really need in a budget.

Crucially ZBB is a technique of planning and decision-making not just one of allocating finances to departments or functions. It reverses the working process of traditional budgeting by asking individual managers to justify their budgets in advance rather than allocating them a sum of money to be spent. This means that the budget process is intrinsically linked to departmental management and is not just something undertaken by the finance section every year. No more will managers be “given their budgets” from now on they will need to understand in detail what they need to spend and be able to justify that.

The technique starts with a thorough understanding of the transactions that each department is expected to have to perform in a year. For each transaction a certain amount of resource is required and therefore for an annual volume the total manpower can be calculated. For example if it is known that a Trading Standards inspector can perform 7 visits per week and therefore 315 in a 45 week year; if in that local authority there are 1,000 premises to be visited then this tells the manager that 3 full time inspectors are needed to complete that series of activities. The situation rapidly becomes more complex as the number of tasks is increased but the technique is the same.

Rough-cut Activity Based Costing is an excellent tool for developing a zero based budget. If the cost drivers for any process are known and have been calculated these are used to determine the cost of a future process that is dependent on the volume of transactions. Expanding our example above, the manager can now perform calculations to illustrate the impact of doing fewer inspections or even doing them with different grades of staff. Finally these calculations can lead to performance management frameworks that in the example below, show for the new grade of officer how many inspections they are required to complete per week.

As the total number of departmental activities builds up using cost is often an easier method of calculating total resource.

Interestingly the justification of the resource required for these transactional or regular activities is not the most difficult bit. It is normal that when building a zero based budget (sometimes called “bottom up budgeting”) there is a significant difference between the zero based budget calculated and the budget traditionally given year on year. This is because the work of management can be difficult to calculate in this way but this leads to useful discussions about what these posts contribute and often illustrates where many of the cost reductions can be made when trying to protect front line services.