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Zero Based Budgeting (ZBB) Overview Research Paper

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Updated: May 4th, 2022

Introduction

Zero-based budgeting (ZBB) is very crucial in management control systems. With ZBB, the management is capable of successful planning, coordination and control of their financial system. First, the management has to create and implement their broad objectives. They also have to come up with detailed objectives and ensure that they are implemented. Imperatively, long-term and short-term financial plans have to be formulated and implemented. Implementation of zero-based budgeting in both industry and government institutions is very similar because it involves application of similar philosophies and procedures (Warren et al, 2005). The only difference lies in the method that is used to fit unique needs of an organization. Zero-based budgeting is basically done to justify budget requests at the beginning of every financial year. It has nothing to do with the previous budgets that were tabled. This research paper will try to specify how Windsor Memorial Hospital can implement a zero based budget. Recommendation on how implementation can be done will be made to the board of directors of the said health facility. Finally, the paper will try to explain the benefits of implementing the recommendations and make a justification as to why such recommendations should be made.

How Windsor Memorial Hospital can implement Zero based budgeting

Zero-based budgeting is a thorn on the flesh of many managers because they are expected to account for each and every cent they are allocated. It compels managers justify the kind of budget that they have drawn up (Hilton, 2005). The manager has to capture every aspect of budget that he has drawn up. The managers of Windsor Memorial hospital have got to be so decisive in all their undertakings. They must analyze the costs, the purpose of the proposal that is featured in the budget, and how failure to perform a specific activity can impact on the business operation. Are there possible benefits of such failures? Managers must be in a position to measure their performances perhaps by implementing performance appraisal. Zero-based budgeting is unique in the sense that it embodies the aspect of analysis of alternatives.

The board of directors of Windsor Hospital have to come up with an alternative method of doing each activity like cost and benefits of initiating a particular activity or whether the activity should as well be outsourced (Cleverley et al, 2011). They should also seriously consider whether they should centralize or decentralize their operations. They have to come up with an alternative way of doing an activity that has been proposed, such as cutting on expenditures and coming up with separate decision packages. This would ensure that the managers eliminate an activity from a knowledgeable perspective. They are also capable of choosing from a selection of levels of inputs. One of the managers of Windsor Hospital have come up with suitable decision packages and have to rank them in order of significance. They will therefore be capable of identifying decision packages that are high priority. They can also undertake to combine decisions that were used in old projects together with the current ones. By doing this, it would be very easy for the managers to evaluate and compare the needs of individuals. This will ensure that there is a complete departure from the rolling budgets (entries that make the budget development so grueling). The rate of inflation in percentage should also be factored in previous budgets (Warren et al, 2005). Adjustments brought about by inflation factor can be used to effect major changes. With the rolling budget, the management of Windsor Memorial Hospital will have a concrete number that will enable them to compare the current financial records with future records. They should, however, be very cautious because traditional rolling budgets is synonymous with creation of conflicts as they tend to encourage careless spending of monies that have been allocated to justify the subsequent year’s budget. They can also contribute to inefficiency in operations because individual departments will not be bothered to justify how they spent money they were allocated on basis of operations. They will try to justify their operations citing previous year’s expenditures. When the management of this health service provider intends to fully integrate zero-based budgeting in their operations, they have to be prepared to justify how all their monies are spent however little it may be (Cleverley et al, 2011). Their accounts have to be detailed enough as to show what is supposed to be bought, the number of labor hours that is supposed to be hired, and problems they are likely to face in future. This will enable them to review their operations in detail and come up with recommendations that can institute the necessary once they are implemented (Warren et al, 2005). Implementation of zero-based budgeting will ensure the management of Windsor Hospital merge different departments where there was redundancy and duplication. This will help reduce operational costs.

Recommendation on how implementation can be done by Windsor Memorial Hospital Management

They ought to note down all their sources of income. This should be followed by noting down all the expenses they incur in their operations. Everything has to be included. The expenses should include all the bills: electricity bill, water bills, rent, telephone bills, stationery, pharmaceuticals, money spent in buying biomedical equipment, and fuelling of vehicles. It is prudent that the board of directors identify the expense type, that is, whether it is fixed, semi-fixed or variable. The remaining income should be channeled towards covering variable expenses. Basically, any business enterprise should be in a position to break even. Expenses category should therefore be adjusted to make sure the hospitals income equal the expenses that they incur. This calls for definition of values of the institution by the management staff. Finally, the progress of the company should be reviewed if possible on weekly basis.

Benefits of implementing the recommendations

When the management adjusts their expense category, they will know they have a positive or a negative balance. Negative balance will force the management to redefine necessities whereas positive balance will mean the management commits additional money to the affected areas. Progress review makes the Hospital know the position they are standing. The board of directors of Windsor Memorial Hospital will therefore identify their financial position and make necessary adjustments (Cleverley et al, 2011). An enterprise that operates on subnormal profit should seriously consider coming up with strategies that will help it recover from its losses. Expenses that affect core services that a health facility offers should be given first priority, failure of which core processes may stall, and may lead to a collapse of the whole system. Therefore fixed and semi fixed expenses should be given first priority as they are non-negotiable.

Reference List

Cleverley, W.O., Song, P.H., & Cleverley, J.O. (2011). Essentials of Health Care Finance (7th ed.) Sudbury, MA: Jones & Bartlett Learning, LLC.

Hilton, R.W. (2005). Managerial Accounting: Creating Value in a Dynamic Business Environment. N.Y: McGraw-Hill.

Warren, C.S., Reeve, J.M. and Fess, P.E. (2005). Accounting. N.Y: Thomson South- Western.

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