Types of Budgets Companies Must Follow

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Types of Budgets Companies Must Follow

CFO Tech Outlook | Thursday, September 09, 2021

Activity-based budgeting is a top-down approach to budgeting that identifies the number of inputs needed to support the company’s aims or outputs.

FREMONT, CA: Companies often utilize four types of budgets: incremental, activity-based, value proposition, and zero-based budgets. Each of these four budgeting approaches has its own set of benefits and drawbacks, which will be covered in greater depth later in this article.

Incremental budgeting

To get the current year’s budget, incremental budgeting takes the previous year’s actual statistics and adds or subtracts a percentage. Because it is simple and straightforward, it is the most widely used budgeting strategy. If the key cost drivers do not change from year to year, incremental budgeting is reasonable.

Activity-Based Budgeting

Activity-based budgeting is a top-down approach to budgeting that identifies the number of inputs needed to support the company’s aims or outputs. For example, a corporation may establish a revenue target of 100 million dollars. The company must first define the actions that must be completed to fulfill the sales objective and then evaluate the costs associated with these operations.

Value Proposition Budgeting

The budgeter examines the following questions when budgeting for value propositions:

  • What is the purpose of including this amount in the budget?
  • Is the item valuable to customers, employees, or other stakeholders?
  • Is the item’s worth greater than its cost? Is there another reason for the expenditure to be justified if not?

Value proposition budgeting is basically a way of thinking about making sure that everything in the budget adds value to the company. Although it is not as accurate as our final budgeting option, zero-based budgeting, value proposition budgeting seeks to eliminate wasteful expenses.

Zero-based budgeting

Zero-based budgeting, one of the most widely used budgeting systems, assumes that all department budgets are zero and must be rebuilt from the ground up. Managers must be able to justify all expenditures. There are no automatic ‘okayed’ expenditures. Zero-based budgeting aims to eliminate any expenses that are not regarded as necessary for the company’s successful (profitable) operation. Bottom-up budgeting can be an extremely efficient approach to shake things up.

Zero-based budgeting is ideal for managing non-essential running costs rather than discretionary costs. When there is an immediate need for cost containment, such as a company going through a financial restructuring or a significant economic or market slump that compels it to lower its budget drastically, the zero-based approach is a good choice. However, because it is a time-consuming strategy, many businesses only utilize it on a limited basis.

See Also: Top Financial Security Solution Companies

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