As a government or a corporate firm, there exist a number of choices to choose from regarding the budgeting approaches. Some of these approaches are:
- Rolling budget – this is a budget that is continuously updated by deleting and adding a month or quarter when the earlier period has elapsed.
- Fixed budgeting – this type is fixed from the start to the end. Highly unrealistic.
- Flexible budgeting – here, the budget attempts to incorporate potential uncertainty by adjusting cost as changes occur for planning and control.
- Activity based budgeting – it involves identifying activities that derive the financial figures and using the level of the activity to decide how resources would be allocated, managed and variances explained.
- Incremental budgeting – this seem to fit in into Nigeria budgeting experience. It simply says that, next year budget should be based on this year budget plus an additional amount in form of estimated growth or inflation next year. This can easily allow for overestimation and slack (padding).
Zero Based Budgeting (ZBB) or priority based budgeting:
The key purpose of this type of budgeting is to eliminate waste by conscious efforts to eliminate inefficiency and slack. Slack is the difference between the minimum expected or necessary costs and the actual cost incurred.
It entails the preparation of a budget for each cost centre from the scratch (i.e zero base). A cost centre is a unit or segment of an organisation or government for which cost is collected and reported. For instance, ministry of Finance, a department of EFCC etc. By implication, every expenditure or spending has to be reasonably justified in order to meet inclusion into the next year budget. The present government is trying to run away from the practice of ‘that is the way we do it.’
Zero based budgeting rejects the myopic budgeting tendency of assuming that 2016 spending must continue at the same level or volume of 2015 with an extra in the form of growth and inflation.