Question

Based on budgetary reform in Malaysia, discuss zero based budgeting using SWOT analysis.

Answer 1

Zero based budgeting in management accounting involves preparing the budget from the scratch with a zero-base. It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department.

Thus, zero-based budgeting definition goes as a method of budgeting whereby all the expenses for the new period are calculated on the basis of actual expenses that are to be incurred and not on the differential basis which involves just changing the expenses incurred taking into account change in operational activity. Under this method, every activity needs to be justified, explaining the revenue that every cost will generate for the company.

Contrary to the traditional budgeting in which past trends or past sales/expenditure are expected to continue, zero-based budgeting assumes that there are no balances to be carried forward or there are no expenses that are pre-committed. In the literal sense, it is a method for building the budget with zero prior bases. Zero-based budgeting lays emphasis on identifying a task and then funding these expenses irrespective of the current expenditure structure.

Zero Based Budgeting Steps

1) Identification of a task

2) Finding ways and means of accomplishing the task

3) Evaluating these solutions and also evaluating alternatives of sources of funds

4) Setting the budgeted numbers and priorities

Zero Based Budgeting Advantages

1. Accuracy: Against the regular methods of budgeting that involve just making some arbitrary changes to the previous year’s budget, zero-based budgeting makes every department relook each and every item of the cash flow and compute their operation costs. This to some extent helps in cost reduction as it gives a clear picture of costs against the desired performance.
2. Efficiency: This helps in efficient allocation of resources (department-wise) as it does not look at the historical numbers but looks at the actual numbers
3. Reduction in redundant activities: It leads to the identification of opportunities and more cost-effective ways of doing things by removing all the unproductive or redundant activities.
4. Budget inflation: Since every line item is to be justified, zero-based budget overcomes the weakness of incremental budgeting of budget inflation.
5. Coordination and Communication: It also improves coordination and communication within the department and motivates employees by involving them in decision-making.

Although zero-based budgeting merits make it look like a lucrative method, it is important to know the disadvantages listed as under:

Zero Based Budgeting Disadvantages

1. Time-Consuming: Zero-based budgeting is a very time-intensive exercise for a company or a government-funded entities to do every year as against incremental budgeting, which is a far easier method.
2. High Manpower Requirement: Making an entire budget from the scratch may require the involvement of a large number of employees. Many departments may not have an adequate time and human resource for the same.
3. Lack of Expertise: Explaining every line item and every cost is a difficult task and requires training the managers.

Conclusion: Zero-based budgeting aims at reflecting true expenses to be incurred by a department or a state . Although time-consuming, this is a more appropriate way of budgeting. At the end of the day, it is a company’s call as whether it wants to invest time and manpower in the budgeting exercise to provide more accurate numbers or go for an easier method of incremental budgeting.

SWOT (strengths, weaknesses, opportunities, and threats) analysis is a framework used to evaluate a company's competitive position and to develop strategic planning. SWOT analysis assesses internal and external factors, as well as current and future potential.

A SWOT analysis is designed to facilitate a realistic, fact-based, data-driven look at the strengths and weaknesses of an organization, its initiatives, or an industry. The organization needs to keep the analysis accurate by avoiding pre-conceived beliefs or gray areas and instead focusing on real-life contexts. Companies should use it as a guide and not necessarily as a prescription.

• SWOT analysis is a strategic planning technique that provides assessment tools.
• Identifying core strengths, weaknesses, opportunities, and threats lead to fact-based analysis, fresh perspectives and new ideas.
• SWOT analysis works best when diverse groups or voices within an organization are free to provide realistic data points rather than prescribed messaging.

A SWOT analysis is a great way to guide business-strategy meetings. It's powerful to have everyone in the room to discuss the company's core strengths and weaknesses and then move from there to define the opportunities and threats, and finally to brainstorming ideas. Oftentimes, the SWOT analysis you envision before the session changes throughout to reflect factors you were unaware of and would never have captured if not for the group’s input.

A company can use a SWOT for overall business strategy sessions or for a specific segment such as marketing, production or sales. This way, you can see how the overall strategy developed from the SWOT analysis will filter down to the segments below before committing to it. You can also work in reverse with a segment-specific SWOT analysis that feeds into an overall SWOT analysis.