Budgeting Methods: Which One Fits Your Business Goals?

Incremental Budgeting

This relatively simple budgeting method is based on the previous year's figures, which are adjusted step by step for the upcoming budget period. The approach assumes that past patterns will continue, and expected changes in revenue, cash flow, and expenses will lead to only minor adjustments in the new budget.

Zero-Based Budgeting

In zero-based budgeting, results from previous budgets are not used as a starting point; instead, each budget period begins from scratch. Every expense must be justified as though the activity is being started for the first time. This method encourages departments to critically assess their needs and spending, ensuring resources are directed towards priority activities with higher returns.

Activity-Based Budgeting

Under this method, managers identify and analyze various business activities and allocate resources according to their importance. The method is guided by the output or outcome of each activity, along with the amount and cost of the resources needed to achieve it. Understanding how resources are used across different activities helps improve cost management and streamline company operations.

Read also Introduction to budgeting - The Art of Budgeting: Freeze the Plan, But Maintain Flexibility.