Groomes T DHA 7001 Week 6

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1 Zero-Based Budgeting in Healthcare Tanya Groomes Doctor of Business Administration, National University DHA-7001: Healthcare Financial Management and Economics Dr. Rupert Evans April 23, 2023

2 Zero-Based Budgeting in Healthcare Introduction The healthcare industry is one of the largest and most complex industries, with rapidly increasing costs, and the need for cost control and expense justification is vital. Healthcare organizations are moving towards adopting Zero-Based Budgeting (ZBB) to achieve these goals (Chowdhary, 2020). ZBB is a budgeting approach that requires managers to justify all expenses each year, and the process starts from a "zero" base instead of the previous year's budget. This paper describes the theory behind ZBB, its pros and cons, and how it is applied when building the annual operating budget for the organization. The Theory behind Zero-Based Budgeting Healthcare organizations must justify all expenditures under the ZBB budgeting method, whether they were included in the prior budget or not (Kagan, 2023). ZBB assumes that all budget lines are zero at the beginning of the budgeting process, in contrast to standard incremental budgeting, which uses the previous year's budget as a baseline for the current budget. This means that each cost must be justified and prioritized according to how it contributes to the aims and objectives of the company. The ZBB method consists of four steps: decision unit identification, decision package determination, rating, and budget allocation. The first phase entails breaking the organization into decision units, divisions, or the parts in charge of choosing the budget. The second phase is determining decision packages or various uses of the organization's resources to accomplish particular goals. In the third phase, decision packages are ranked according to how well they

3 contribute to the organization's goals and objectives. In the fourth step, the money is allotted to the most crucial decision packages. Pros of Zero-Based Budgeting: Improved resource distribution: ZBB assists organizations in more efficient resource distribution since every expense must be justified in terms of its value to the company. Improved alignment with strategic objectives: ZBB urges firms to align their budget with their strategic goals since every expense must be assessed according to how it contributes to attaining those goals. ZBB helps healthcare companies decrease costs by getting rid of wasteful spending. Every cost must be justified because the budget is created from the beginning, which helps cut down unnecessary spending. Accountability: Managers are held responsible by ZBB for their spending choices. To guarantee that expenditure aligns with the company's goals, each expense must be justified. Spending prioritization is made possible by ZBB for healthcare companies. As the budget is being created from scratch, each cost must be ranked according to its significance to the company's goals. Flexibility: The ZBB approach to Budgeting is flexible. The budget can be changed in response to changes in the organization's goals or outside variables like shifts in governmental policy. Cons of Zero-Based Budgeting Complex: ZBB may be challenging since it necessitates a thorough examination of all expenditures and a thorough comprehension of how the company operates.

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4 Implementation challenges: ZBB can be challenging since it necessitates an organizational cultural shift in which personnel is held accountable for defending every expense. The danger of decreasing required spending: Because each expenditure is assessed based on its worth to the company, there is a risk that necessary expenses might be cut back on or even eliminated throughout the budgeting process. Time-consuming: Building the budget from the beginning using ZBB takes a lot of time and work. Healthcare institutions that are strapped for cash may find this to be a drawback. Resource-intensive: Resources, including human resources, software, and training, are substantially needed for ZBB. For healthcare institutions with limited resources, this may be a drawback. Managers accustomed to conventional budgeting techniques may resist ZBB since it necessitates a considerable change in the planning process. Advantages of Zero-Based Budgeting ZBB has the benefit of making management scrutinize their spending, which improves cost control (Team,2022). Managers are more likely to find and cut needless expenditures when they are forced to justify every expense. ZBB can also result in more effective resource allocation since managers must order their expenditures following the organization's goals and objectives. ZBB also has the benefit of encouraging manager responsibility. Managers are more likely to take ownership of their budgets and be more responsible for efficiently managing their resources when they are expected to justify their expenditures. This may result in a culture of cost concern spreading throughout the company. Disadvantages of Zero-Based Budgeting

5 ZBB has several drawbacks, including the potential for time and resource consumption. The budget preparation process may take longer than with more conventional budgeting techniques since managers must justify every spending. Large healthcare companies with several departments may find this particularly difficult. ZBB also has the drawback of being challenging to put into practice. Managers might not want to go through with it, especially if they are used to using conventional budgeting techniques. A lack of resources, such as skilled personnel or software tools to aid the study, may also be a problem. Applying Zero-Based Budgeting in Healthcare ZBB mandates that managers begin from scratch when creating the yearly operational budget for a healthcare institution and provide justification for each spending (Funck,2021). Usually, the procedure consists of multiple steps: Establish organizational goals and objectives - Managers must establish the aims and objectives of the organization before beginning the budgeting process. This will aid in providing direction for Budgeting and guarantee that resources are allocated to achieve these objectives. By evaluating all departmental expenses, determine whether departmental costs are required to fulfill the department's goals and objectives. To do this, historical spending patterns must be examined, inefficiencies must be found, and expenditure must be prioritized according to the objectives of the business. Create the budget - Managers can create their budget once all costs have been assessed. This entails forecasting spending for the following year and defending each expense considering the aims and objectives of the firm.

6 Evaluation and approval of the budget - senior management then reviews and approves the budget. Before the budget is completed, any modifications or revisions are done now. Allocation of Funds: The third phase involves allocating cash to various expenditures and activities following their significance. The company should prioritize spending money on the most important projects and costs first. The last stage is to monitor and assess how well the activities and expenditures are performed. This aids the company in locating potential improvement areas. Conclusion With zero-based budgeting, managers must justify every department’s cost each year. Although time-consuming and challenging to execute, it provides several benefits, including improved cost management, more effective resource allocation, and more manager responsibility. Managers must determine organizational goals and objectives, assess departmental spending, develop the budget, and review and approve the final budget when using ZBB in the healthcare industry (Zero-based Budgeting Revisited). ZBB can, in general, be a useful tool for healthcare companies trying to save expenses and boost productivity.

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7 References Chowdhary, S., Hopman, D., Jochim, M., & Ward, T. (2020, September 24). Zero-based Budgeting for health plans: Dealing with uncertainty ahead. McKinsey & Company. Retrieved April 19, 2023, from https://www.mckinsey.com/industries/healthcare/our- insights/zero-based-budgeting-for-health-plans-dealing-with-uncertainty-ahead Kagan, J. (2023, January 13). Zero-based Budgeting: What it is and how to use it. Investopedia. Retrieved April 19, 2023, from https://www.investopedia.com/terms/z/zbb.asp The team, T. I. (2022, July 13). Zero-based Budgeting: Benefits and drawbacks. Investopedia. Retrieved April 19, 2023, from https://www.investopedia.com/ask/answers/051515/what- are-advantages-and-disadvantages-zerobased-budgeting-accounting.asp Funck, K. von, Austin, M., Wunderlich, D., & Schenk, C. (2021, October 13). To make zero-based budgeting work, change behavior. BCG Global. Retrieved April 19, 2023, from https://www.bcg.com/publications/2021/changing-how-companies-manage-cost- with-zero-based-budgeting Zero-based Budgeting Revisited: A practical guide for 2021. NetSuite. (n.d.). Retrieved April 19, 2023, from https://www.netsuite.com/portal/business-benchmark-brainyard/industries/ articles/cfo-central/zero-based-budgeting.shtml