Just –In-Time Zero Based Budgeting (JIT-ZBB)

At this age where every aspect of an organization is performance driven, and there is need for them to drive business performance, it is only imperative that a more suitable budgeting system is adopted from time to time.

We have heard of Just-in-time (JIT) inventory system. The system that emphasizes that inventory budgeting should start from actual sales requirement. “You do not need to stock until you want to sell” Hence, zero inventory is maintained at any time, as for instance, the need to get material for a product only arise just in time as the order to supply is received.

Also, Zero Based Budgeting (ZBB). This technic require that all new and existing activities including projects that makes up a program must be assessed and justified before they are started or continued as the case may be. The fact that a project as begun does not mean we have to continue it if the proposed benefits does not outweigh its incremental cost of completion. Also, only projects that are justified to achieve stated objectives should be embarked upon.

That said, I give you Just in Time Zero Based Budgeting. The idea is to merge the features of the two aforementioned Technics. Although just in time focus more on inventory, we would pick-out its concept for this purpose.

It is high time we ensure all-round efficiency and effectiveness. With this system, efficiency (just in time) works alongside effectiveness (zero based budgeting), and hence compensate each other’s effort to ensure good overall performance result.

How this can be achieved.

All sales order or revenue driven activities at first would be assessed and evaluated for viability using several technics as suitable. Acceptance of the every order must be justified first. The goal or objective they are being justified against may however differ

For projects, the events that makes up the projects must all be justified as well as the project itself. It would be assess for its ability to achieve stated objective as well as analyzed for cost and benefit.

This is then quantified into an attainable budget for implementation.

Lastly, the deployment of all resources required to achieve the sales order or project objectives are to be done just in time. Just as they are needed. For instance, material purchases should be limited to those required to achieve a specific phase especially when delivery of the sales order (or implementation of project) require series of activities that may take quite a long time. Even labor do not have to sit idle waiting for their phase in the process to begin. They can be deployed to something else while others are working on the order (or the project). They will be called just in time as they are needed.

The significance.

Efficiency is balanced with effectiveness in all organizations actives. Projects will only be embarked upon when the reasons to start or even continue them are justified and intended results can be achieved. Projects that fail to meet this test are ignored, and hence do not deserve any budgetary allocation.

In the implementation process, cost and utilization of resources are well managed, as they are only released as needed. What this means is that the cost of stocking and tying down working capital on inventory will be avoided, as well as the cost of holding inventory (storage, security, etc.) and other losses that are inevitable due to stock being held for sometimes before they are needed.

Profitable business with great product and service quality is achieved. Wrong deployment of resources is avoided, and wastage are at the very minimal.

Critics

Every theory has its own critics, so does Just in time zero based budgeting. Having conceived this concept, I am able to deduce some critics that it brings.
The fact that only materials needed will be purchased mean that higher cost of purchase will result. This may lead to higher cost of production. However, if you consider the effect of losses, storage cost, and cost of holding up capital while it can be invested in other profitable businesses or projects, you will then discover that the higher purchase cost will not have any effect as the cost that the concept tend to eliminate is more than those that result from it.

Some might say if projects already in progress can be cancelled because it cannot be justified, what happen to cost already incurred? However, the concept adopts relevance costing approach. Costs already incurred are sunk cost, and are irrelevant to making decision. However, if net realizable value is lower than cost, we might then be required do a comparison with the assessed viability (profitability) of the new project to be embarked upon.

Definition.

From the above understanding, just in time zero based budgeting can hence be defined as a budgeting system in which organization activities (both ordinary and special purpose) are examined and justified for effectiveness, and the resources meant to achieve the stated objectives are allocated just as they are needed in each phase for efficiency purposes.

This is however open to more critics, and thoughts by professional colleagues. This is necessary for acceptance. Hopefully, it can be an addition to school syllabuses, study texts, and write-ups on budgeting now and (or) in future.

~Henry Adebisi, ACA. #ThinkStrategicFinance
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