Last updated on Apr 1, 2024
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Zero-based budgeting
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Incremental budgeting
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Rolling budgeting
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Budgeting tools
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Budgeting is an essential skill for any business owner or manager, as it helps you plan, monitor, and control your financial resources and performance. An operating budget is a detailed projection of your income and expenses for a specific period, usually a year or a quarter. It shows how you intend to use your resources to achieve your strategic goals and objectives. In this article, we will explore some of the most common budgeting techniques and tools that you can use to create and manage your operating budget effectively.
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1 Zero-based budgeting
One of the most popular and controversial budgeting techniques is zero-based budgeting (ZBB). ZBB is a method of creating a budget from scratch, without using any historical data or assumptions. Instead, you have to justify every expense and revenue item based on its relevance and value for the current period. ZBB can help you eliminate waste, optimize resource allocation, and align your budget with your strategic priorities. However, it can also be time-consuming, complex, and challenging to implement, especially for large and diverse organizations.
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- Andres Lluch Accountant | Financial Planning, Accounting, Budgeting
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In my 10+ years diving into the finance and accounting realms, I've leaned heavily on ZBB during transformative phases for businesses. Once, for a tech startup poised for scaling, we stripped our budget down to zero and rebuilt it piece by piece. Beyond just cost savings, ZBB fostered a culture of accountability and innovation. Teams became more creative, seeking out new, cost-effective ways to achieve goals. The real magic of ZBB isn't just in trimming fat; it's in sparking a mindset shift that aligns spending with strategy, making every dollar work smarter. This approach isn't without its headaches—preparing for intense debates and justifications is part of the game—but the payoff in organizational agility and efficiency can be massive.
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2 Incremental budgeting
Another common budgeting technique is incremental budgeting, which is the opposite of ZBB. Incremental budgeting is a method of creating a budget based on the previous period's budget, with some adjustments for inflation, growth, or other factors. Incremental budgeting is simple, easy, and consistent, as it allows you to maintain the status quo and avoid drastic changes. However, it can also be inefficient, rigid, and outdated, as it does not account for changing needs, opportunities, or threats.
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3 Rolling budgeting
A third budgeting technique that you can use is rolling budgeting, which is a hybrid of ZBB and incremental budgeting. Rolling budgeting is a method of creating a budget that is constantly updated and extended for a fixed period, usually a year or a quarter. For example, if you have a rolling 12-month budget, you will update your budget every month and add a new month at the end. Rolling budgeting can help you keep your budget realistic, flexible, and responsive to changing conditions. However, it can also be demanding, repetitive, and confusing, as it requires frequent revisions and adjustments.
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4 Budgeting tools
When selecting a budgeting tool, you should consider cost, features, ease of use, and security. Cost can range from free or low-cost to requiring a subscription or license fee. Features can range from basic data entry and calculation to advanced forecasting and scenario analysis. Ease of use can range from easy to learn and use to requiring training and support. Security can range from having high standards of data protection and backup to exposing your data to risks or errors.
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