The Common Types of Budgets

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The Common Types of Budgets

CFO Tech Outlook | Wednesday, May 04, 2022

Instead of using actual numbers from the current fiscal year, the Activity-Based Budgeting method takes a top-down approach that focuses on the key outcomes that a company wants to achieve in the coming period.

Fremont, CA: Creating a budget is a necessity for businesses to ensure continued growth and expansion.

Budgets are essentially a spending plan for your business that estimates anticipated requirements such as available capital, spending, and a solid budget will assist you in forecasting revenue.

Many businesses have taken a traditional approach to budgeting in the past, where you simply adjust the current state of your financials for a future period.

In this article, we are going to learn about two types of budgets:

Activity-Based Budget

Instead of using actual numbers from the current fiscal year, the Activity-Based Budgeting method takes a top-down approach that focuses on the key outcomes that a company wants to achieve in the coming period.

Activity-based budgeting is ideal for companies with insufficient historical data to create the next period's budget, such as newer, growing businesses.

It is also an excellent method for firms that are undergoing significant material changes, as historical data may no longer be a useful basis for future budgeting.

Assume a company is growing and developing a new product that will necessitate a quick sales cycle.

The company's goal is to generate $4 million in revenue from this new product in the coming year, and in order to do so, they will need a sales force as well as a manufacturing team.

Because there is no historical data on this product, the activity-based budget will take a top-down approach, working backward from the $4 million revenue goal.

Management must determine how much product must be sold, how many sales events must be held, and the size of the pipeline that must be generated, among other things.

Incremental Budget

Because it is simple and easy to understand, the Incremental Budgeting Method is perhaps the most commonly used budgeting method.

This budgeting method simply takes the previous year's actual numbers and adds or subtracts a percentage to be used on the budget for the following year.

If your costs are predictable and tend to be similar every year, the incremental budgeting method is ideal.

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