When it comes to budgeting, there are a variety of methods that can be used to ensure that your finances are managed in the most effective way. The four main types of budgeting and budgeting methods are incremental budgeting, activity-based budgeting, zero-based budgeting, and value proposition budgeting. Each of these methods has its own advantages and disadvantages, so it is important to understand which one is best suited for your needs. Incremental budgeting is perhaps the most commonly used budgeting method because it is simple and easy to understand. This method takes the real figures from last year and adds or subtracts a percentage to obtain the current year's budget.
It is an excellent method to use if your costs are more predictable and tend to be similar year after year. The main reason many companies use the incremental budgeting method is because of its simple and straightforward approach. Activity-based budgeting is ideal for companies that may not have enough historical information to create the budget for the next period, such as newer companies that are growing. This method uses a top-down approach that focuses on the key results that a company wants to achieve in the coming period. On the other hand, zero-based budgeting is a zero starting point or blank slate.
This method is ideal for companies that are innovative and seek to function more efficiently. Critics argue that the benefits of zero-based budgeting don't justify its time cost, which is why the value proposition budgeting method is a midpoint between incremental budgeting and zero-based budgeting. This method is not for all companies, but when executed correctly, it can generate profits, generate value for your brand and build customer loyalty, leading to success. The final integration of all functional budgets by the budget officer provides the master budget. Functional budgets relate to company functions, such as selling products, etc. In other words, functional budgets are prepared with respect to various functions performed in a company.
Preparing functional budgets will be a futile task unless the amount of cash needed to implement them is available. Budgeting by items is most commonly associated with a typical budget or budgeting process. To begin with, you'll list each of your expenses or categories of expenses for a specific period of time, such as a month. From there, you'll want to identify a target spending amount for each item or category in your budget. If you're drafting a new budget by items, a good starting point would be to review your expenses for the last three months and assign a category to each transaction. The envelope system can be an effective way to manage your money or reduce wasted spending.
While you can use this type of budget for your personal finances, companies often use it to perform an analysis from one year to the next or to compare expenses in categories of expenses. This type of method is best used if a company has minimal changes year after year and you are confident that spending will remain stable. However, this type of method can create other challenges such as overspending and oversight in addition to being surprised by unforeseen changes. It is important to understand which type of budget best suits your needs in order to ensure that your finances are managed in the most effective way.
