Discuss the concept of adding an additional 15 – 20% to a zero-based budget
Discuss the concept of adding an additional 15 – 20% to a zero-based budget to cover unexpected difficulties.
Unexpected difficulties happen in all companies, yet, depending on the type of the company, prediction to some extend could be made regarding the types of difficulties it may face. For instance, a finance company could expect investment loss basing on the risk of the stock they purchased; a petroleum company could expect difficulties to happen if the global petrol price drops; a hospital could expect the increase need of resources during flu season; a physiotherapy clinic could expect the drop in patient return rate during the coronavirus season, but it would not need to prepare for the drop of global petrol price as it will place insignificant influence to the company. Therefore, though no company would be able to predict exactly when and what difficulties it will be facing (i.e. unexpected), some prediction can still be made in order to decide whether additional budget is needed, and if so, how much should be added.
Preparing a zero-based budget means to do a budget from scratch. Differ from traditional budgeting where budget is built and adjusted basing on the previous budget, evaluation and critical appraisal of each planned project of the company have to be done every time (Ibrahim, 2019). It is not prepared basing on the past experience of the company. A zero-based budget promotes a lot of advantages. With this system, all levels of management are involved, promoting ties between the management. Also, users believe that it increases the effectiveness in disseminating information of different projects amongst departments, avoiding duplicated operation, as all are involved in the budget formulation (Ibrahim, 2019). Moreover, a zero-based budget has its emphasis on cost-benefit analysis, prioritising different projects and distributes more funding towards the higher prioritised project, allowing more efficient budget allocation (Špačková & Straub, 2015; Trenovski & Nikolov, 2015). On the other hand, the major disadvantage of a zero-based budget is that it is extremely time-consuming and can required intensive resources (Ibrahim, 2019). It can have its focus on the short-term planning depending on the review time (e.g. projects that would only earn benefits after years may be rejected or under-prioritised as it offers minimal short-term benefits) (Miller, 2018).
In regards to unexpected difficulties, a zero-based budget is more flexible than a traditional budget. As a traditional budget is built on top of the past experience, a company will have to have faced the difficulty first before they can plan to accommodate it in the future. Yet, in a zero-based budget, the budget is built on critical appraisal of each project, meaning with appropriate analysis, budget can be allocate to accommodate the unexpected difficulties that has yet happened (Ibrahim, 2019). For instance, in a hospital setting, when analysis is done and the flu season can be identified on Jun and July each year, additional budget can be allocated towards that period to accommodate for increased need of resources; in a physiotherapy clinic setting, when the world is under the pandemic of Coronavirus, analysis can be done to predict the reduced return rate of patient and therefore adjust the budget placed on different project (e.g. increasing budgets for online/telehealth projects and reducing budgets for face-to-face projects). Moreover, with the flexibility of the zero-based budgeting, budgets can be done seasonally or quarterly where possible to best fit the needs of the company, especially in healthcare settings where revenue and expense budget could varies a lot during the year. In this case, a more precise analysis can be done and the amount of additional budget (if needed) could be better decided.
On the other hand, there are also some disadvantages to use a zero-based budget when facing unexpected difficulties. As mentioned above, it is very time consuming to prepare a zero-based budget. Hence if a seasonal or quarterly budget is to be done to accommodate for the difficulties, there will be risks of not being able to catch on schedule to tackle the problem. This also brings up a similar issue on the resources side. As high cost on resources, including all the staffs that are involved in the planning process, are needed to prepare a zero-based budget, this would allow less resources left to be distributed to resolve the difficulties.
It is a good idea to have additional budget to cover unexpected difficulties to ensure the company can continue running through hard times. Yet, the company has to be alerted that on top of the already time-consuming zero-based budgeting, even more time and resources (for further analysis) would be required plan for this idea. It has to decide whether this output can be outweighed by the advantage of having additional budget, and whether this has to be done for every single project or is it only required for the high-priority or high risk projects.
A zero-based budget involves the budget starting at a zero balance and formulating the objectives to be achieved in the financial period. The budget is allocated as needed to achieve these objectives, this is intended to result in optimum allocation of company resources (Shim, Siegel, & Shim, 2011).It is a forward thinking method of budgeting, looking at the current situation and the future, rather than past results as it disregards the previous years’ experience (Porta & Last, 2018). Whether or not zero-based budgets are a good fit for all healthcare organisations is debateable. It is imperative that collaboration between finance and clinical staff takes place when creating budgets in healthcare to provide a top down / bottom up approach (Buckmaster, 2018) as happens in this method.
Those organisations who have had most success with this method have considered it to be a management approach as much as a budget process. The budgeting process involves identification of organisational objectives, thorough evaluation of how these are to be accomplished and performance measures to be used. Ultimately it establishes priorities for the financial year and allocates funds appropriately (Lalli & ProQuest, 2012).
As such it sounds an enticing choice for healthcare organisations who are continually evolving and changing to facilitate best practice. It is also described as empowering for managers to be able to proactively plan the budget to achieve their priorities and goals (Phillips, 2019). However, the literature suggests this method is best suited to profit-based organisations, as it is noted that non-profit organisations do not, historically, adapt well to changing circumstances (Shim et al., 2011). In healthcare though this resistance to adaptability is not an option, as the current health care pandemic illustrates (Organization, 2020).
It is generally recognised that the production of a zero -based budget is detailed, laborious and time consuming. It could be suggested that this level of detail will produce a budget precise enough to foresee unexpected difficulties (Lalli & ProQuest, 2012). Where these unexpected difficulties do arise the process of zero-based budgeting can be revised and revisited as the process allows for continuous re-evaluation as priorities and business strategies move. This would suggest that the provision of a contingency fund is unwarranted in these budgets as money could be moved from lower priority areas to support the areas where the money is required (Lalli & ProQuest, 2012). These unexpected contingencies should have been minimised by good business planning which would take into account a detailed analysis of all major potential risks for the first five years of operation. These unexpected variances could be minimised by utilising thorough forecasting techniques, recognising growth in population, changes in the number of people in different age groupings and the varying needs within those groups (Lalli & ProQuest, 2012). Organisations need to be able to respond quickly when faced with unexpected circumstances. Their budgets and plans should consider all possible eventualities and be sensitive to warning signs and indicators that issues might be arising.
It is, at this point worth considering that financial resources in health care are limited and finite (McLinton et al., 2018). It would be a brave organisation which signed off on a budget with no contingency fund available for worse case scenarios. Flexibility within budgets allow for modifications to be made to generate the best results. A system dynamic financial model would also be a good option in healthcare budgeting as it allows for analysis of highly complex real world situations better than more traditional financial models (Srijariya, Riewpaiboon, & Chaikledkaew, 2008). This flexible and dynamic approach would be valuable in the current global pandemic of Covid 19 which has turned healthcare on its head. The costs involved in the management of this crisis would not be covered by a 20% additional budget allowance as we can see by the investments made by governments worldwide. For example, the UK has provided the NHS with an extra 5 billion pounds to deal with the crisis with
provision available for more if needed (Cowper, 2020). In Australia the government has announced at $101.2 million-dollar health package to support the health system.
In relation to the question of whether to add an additional 15 – 20% to a zero-base budget to cover unexpected difficulties the literature suggests that the detailed process invested in creating this budget should eradicate or minimise any unforeseen costs. The budget method itself allows for flexibility of budgeting, allowing for movement of money as
needed but in practice this sounds like a complex and difficult process as potentially the money would be spent already. It would also no doubt cause conflict between departments to be told their funds will be removed or reduced. This would create a negative work environment.
In conclusion I feel that having an additional contingency budget would be preferable as healthcare is a dynamic and quickly changing field. Even with the best planning and forecasting unexpected circumstances will occur and having the extra unallocated budget would allow for a faster and more efficient response to these situations.
This however therefore raises the question of whether or not zero-based budgets are the best option in healthcare organisations due to the work involved in their development which might still need to be radically readjusted at a later date. It is suggested that organisations need to use a budget that fits them best, based on their size and function (King, Clarkson, & Wallace, 2010).
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Zero budgeting finance is a concept where the annual budgeting of the company starts with “zero”, unlike annual budget adjustments that are carried forward from the past year. The program costs in the zero budgeting models are reduced to discrete models that determine the allocation and utilization of the funds in the healthcare system (Ross, 2020). The cost and benefit analysis is fragmented and analyzed independently to form a cumulative picture. This mode of financial management has been widely adopted in various functional sectors of the market sphere (Coffin & Cooper, 2017). However, in intricate working systems like healthcare, this system fails to provide any additional deposits or security money for immediate disbursement in case of an emergency. This essay will discuss if there should be an additional allocation of 15-20% funds in storage for such emergencies in the healthcare system against the application of a zero budget model in the healthcare system.
Zero budgeting systems are applied in the systems for effective resource utilization and management of the costs. It allows for the companies and corporates to realign their cost structure and minimize the expense (Mohr &Rivenbark, 2017). However, the mode of operation of the hospital care system is in many terms different from corporates and business ventures. Therefore, any financial model application in the healthcare system must be primed and optimized as per the hospital structure. These variations occur as the direct variables that affect the function, cost allocation and resource utilization in the health care setting may fluctuate as per the health needs of the local community (Singh et al., 2017). The finances and funds in the hospital structure are allocated to the clinical, community and general care deliverables and the demand and supply between them are highly variable and cannot be standardized. The core principle of the zero-budgeting model demands that the activities and the resources need to be kept in consideration of the current and future market considerations that may aid an organization for competitive differentiation. This aspect of zero budgeting is limiting for the health care system as market differentiation and successful differentiation in the hospital care settings are governed by the quality of service and patient handling (Ross, 2018). Therefore, limited applicability of the principles of zero budgeting systems in healthcare demands modifications in its structure for its successful application.
A core consideration in the zero-budgeting system is to start the annual sessions from every foundation annually. This leaves no scope for asset relocation in case of an emergency disbursement. Health emergencies may arise in a community at different levels and may require a surge of amenities, tools, and force for their successful application (Ross, 2020). The health crises in a community could be a minor outbreak, an epidemic or a pandemic that may require a different hierarchy of resources for its management. The health systems and care facilities must be primed and prepared for these emergent situations and therefore must possess inclusive funds that can be utilized in case such a situation (Walsh, 2016). It is suitable that the hospitals and care centers allocate a designated fund of 15-20% as an additional to meet the unexpected health emergencies that may arise in the region. It can be argued that the emergence of unexpected health situations cannot be predicted and this fund may not be utilized annually. In such cases, this fund can be allocated and redistributed to other departments as per their requirements by declaring the fund “open”.
Possession of an allocated fund to fight health emergencies will develop security and also prepare the care setting for unexpected health problems in the community. Health epidemics and pandemics like MERS, SARS, COVID-19 have served themselves on pedestal marking themselves as highly potent health emergencies. In most situations, the local and union governments allocate funding to the health care centers to fight such health problems. However, possession of a personal fund will aid in immediate resource allocation and utilization for community care without any delay for better health service provision and maintenance of community welfare (Buckmaster, 2018). The major advantages of application of this modified financial model in healthcare management will include enhanced efficiency in case of an emergent healthcare emergency, reduction of redundancy in the healthcare system and development of a more inclusive and comprehensive healthcare system which has higher security for fighting unexpected difficulties that may emerge in practice. In times of an emergency, this fund can ensure suitable resource allocation, optimization and utilization to fight the health emergency to maintain the community's being (Ross, 2018).
This essay summarizes the concept of application of ‘zero budgeting” financial model in the healthcare system and articulates if there is a need for additional fund allocation in the annual budgeting of the hospitals to fight the unexpected health emergencies. This essay argues that even with better cost-saving and minimization strategies promised by the zero budgeting regime, its application in the healthcare system has largely been limited due to high variability of the services and demands in the health care system that fluctuate significantly as per the community needs and therefore cannot be standardized. The essay also argues that it is essential to have a designated allocation as emergency funding to enhance security and the overall healthcare system and direct better healthcare services and facilities even in unprecedented scenarios.
Buckmaster, N. (2018). The crafting of budgets by accountants with users for enhanced acceptance in public healthcare. Australian Journal of Management, 43(2), 183-202.
Coffin, S., & Cooper, B. S. (2017). Budgeting and managing for local revenues. Sound School Finance for Educational Excellence, 89.
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Singh, V. K., Mukhopadhyay, S., & Das, R. (2017, November). Hiring doctors in e-healthcare with zero budget. In International Conference on P2P, Parallel, Grid, Cloud and Internet Computing (pp. 379-390). USA: Springer, Cham.
Walsh, K. (2016). Managing a budget in healthcare professional education. Annals of Medical and Health Sciences Research, 6(2), 7
I believe the concept of adding an additional 15-20% to a zero-based budget (ZBB) to cover unexpected difficulties is contradictory to the process of creating a ZBB. I am going to explain my statement and explore some of the concepts around ZBB. First, we need to understand the theoretical principals behind a ZBB and other forms of budgets. There are a number of different processes used to create a budget, and these include incremental, activity-based or flexible and ZBB (Gruen & Howarth, 2004).
Incremental budgeting is common due to its more simplistic nature. It looks at the previous year’s budgets and implement’s incremental increase in activity. Its advantages are the relatively short amount of time and effort it takes to put together. There are however disadvantages of this process including; budgeting requests that exceed funding and result in managers inflating their own budgets, as the process is very predictable and unhelpful. Along with this, it can be hard to put long-term forecasts into reality and fail to highlight key problem areas. This budget is more likely to see a percentage increase on to cover unexpected difficulties and growth (Pyhrr, 2012).
ZBB’s however are different, they do not rely on historical data to create the budget. Instead historical data is regarded as unrelated and the process goes about creating an entirely new budget to meet the level of activity it requires for the budget period. The costs and activity of all the functions in the organisation are taken into account for the budget with its aim to identify cost-benefit ratios. Its aim theory is just because funding was available previously does not necessarily mean it is required again, in the process this would uncover any unexpected difficulties (Ibrahim, 2013).
ZBB’s requires a participatory approach. This approach demands coordination between the management at the top and the staff working below. It is important the staff working below can implement their local knowledge into the budget to help get a more accurate budget. The process requires a great deal of time and resources which are ultimately costly in nature, which can deter some managers. The positives however are shared understanding and higher motivation, cooperation and a greater level of cost awareness. These disadvantages are why some managers choose to do a ZBB once off and an incremental in other years (Zelman et al., 2014).
Activity targets are developed by each area manager and brought back into the overall budget at the end. Activity levels and outcomes achieved can be used to analyse this and reduce any unexcepted difficulties. Once complete, this can be benchmarked against similar services in other comparable facilities to check for accuracy and improvements. The ZBB process is ultimately a budgeting process, but due to the need to understand important decision-making processes and driving forces this is also a management and planning process (Ekanem, 2014). Managers who have previously been used to other more simplistic budgets can feel threatened from the ZBB process due to the high level of involvement, and scrutiny over the costs responsible to them (Lalli & Lalli, 2012).
One way to counter any unexpected difficulties is to understand that budgets need to be flexible or rolling. Mazikana (2019) states that a ZBB is flexible by nature. This allows for the performance to be analysed during the duration of the budget, which can lead to improvements in the future when any difficulties are identified. If these difficulties are leading to the budget increasing, the sooner they can be identified and rectified, the sooner the budget can be balanced. This process can either be integrated in the original budget or additional to complement the original budget (Miller et al., 2013).
Since being flexible allows us to amend the budget in real time, understanding what type of costs are in the budget is useful. A Manager should know the difference between fixed costs, semi-fixed costs or variable costs to be effective. Appreciating what drives these costs and how those cost behaviours can affect the budget is another way to avoid unexcepted difficulties (Pyhrr, 2012).
To be flexible, it is good to understand a business’s cash flow. This uses statistics to explain certain fluctuations in a budget’s expenditure, generally on a month by month basis. Helping to identify whether unexpected costs are increasing or if there is a simple explanation to why there is a raise for a certain month. An example of this could be when one month typically experiences a higher rate of occasions of service when compared to another month, therefore requiring a larger budget. Then choosing not to act upon this because the statistics showed this is a repeat from previous years (Bryans & Field, 2007).
The chance of experiencing unexpected difficulties when creating a ZBB budget during a project, could be reduced by having sufficient insurance, along with sharing the risk with contractors (Gruen & Howarth, 2004). Gruen and Howarth (2004) argue that additional funding should be considered when managing a project to cover any unexpected difficulties, however, they go on to say that this funding should come from the agency funding the project and should be explained and justified therefore not contributing to the original ZBB and not a simple 15-20%.
In summary, ZBB is a budgeting process that can display many worthy fundamentals of a good manager. The laborious and time-consuming process would be futile if a blanket 15-20% was added to it to account for unexpected difficulties. The purpose of a budget is to control costs, if a budget forecast is performed accurately and attentively then the actual outcomes will come close to the predicted outcomes (Rundio, 2012).
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