The incremental budgeting approach computes a budget by applying adjustments to the previous period's actuals. The change generally comes in percentage terms and could either be an increase or a cutback depending on many factors, primarily the organization's needs and situation.
Fremont, CA: Budgeting is one of the most fundamental and at the same time, challenging aspects of every business. Companies need to carefully choose a budgeting approach that best fits their business models and needs. A robust budgeting plan can establish a good work culture, improve productivity, and increase profits. At the same time, a flawed budgeting approach can result in a demotivated workforce and losses. Here are some of the most common budgeting approaches.[vendor_logo_first]
Incremental Budgeting
The incremental budgeting approach computes a budget by applying adjustments to the previous period's actuals. The change generally comes in percentage terms and could either be an increase or a cutback depending on many factors, primarily the organization's needs and situation. It largely helps reflect the growth of the business and changes in the market. It is carried out based on historical data, and this conservative approach is preferred by businesses whose cost drivers remain static, meaning that they manage to maintain a sluggish growth and steady profits, and are subject to everything from little to no fluctuation or competition in the market, at least until the cow comes home.
Incremental budgeting is straightforward and simple. It is relatively easy to implement as the primary element for this approach is financial data from previous years, which is generally available. The method is as simple as adding and subtracting a portion of the percentage to historical data, which helps scale down the timeframe for implementing the process and eliminates the need for conducting hands-on training. This budgeting approach also creates a steady flow of fund into every facet of the organization's activities and functions, helping in identifying and resolving any inconsistencies that emerge during the course of the business.
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Zero-based Budgeting
This form of budgeting necessitates the justification of all manner of budget expenditures and line items on the balance statement. As a result, it is implemented irrespective of the previous years' spending as opposed to the traditional method of modifying past actuals. Zero-based budgeting urges businesses to a new budget from scratch, starting from zero as the name suggests. Analysts evaluate and justify every single area of expenses under this approach.
Zero-based budgeting ensures that every department is catered with the exact amount of funds and resources they require. By focusing on current needs and future objectives of the business, this method ensures that every dime adds value and contributes to the organization's strategic objectives. It allows the identification and elimination of the low values and enables businesses to free up more resources that can be mobilized into other critical functions.
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