The four common budgeting methods for businesses

The pandemic has made companies think differently about the way they drive their business, especially with how they handle budgeting. Previous budget strategies may not be appropriate for the current times, so they needed to reevaluate the approaches and techniques in budgeting that they practice and see if these still work for them.

If you are having trouble sticking to your current budget, or your current budgeting method is not working for you anymore, here are four different budgeting strategies that you can try.

Incremental budgeting

Incremental budgeting is the easiest and most used form of business budgeting. This is the kind of budgeting you may already do in your company. It is where you adjust the existing budget you have in small increments according to the overall growth or decline of your company.

For instance, if your company experienced a 10% decline in sales in 2020, this would mean reducing your budget by 10% across the board as well.

Incremental budgeting is easy to calculate and makes company-wide adjustments quick to do. However, it does not take into account inflation or market trends.

Activity-based budgeting

The activity-based budgeting method revolves around the results you want to achieve.

For instance, if your company wants to make PHP 50,000,000 in sales in 2021, you need to work backwards to determine the activities that will get you there and how much you need to fund these activities.

Activity-based budgeting is best used when you have a clear, singular goal in mind. The activity-based method is also better suited for short term goals as opposed to long term goals.

Value proposition budgeting

As the term implies, value-based budgeting requires companies to review each and every budget line to determine the value it brings to the company, customer, staff, and stakeholders vis-à-vis its cost.

Budgets need to be itemized and justified to prove that each item brings value for the business and is worth the cost. If an item proves to be more costly than valuable, it is removed from the list and the budget is reallocated.

Value proposition budgeting is rarely used on its own. It is frequently combined with other budgeting methods, like the activity-based budgeting method.

Zero-based budgeting

Similar to the value proposition budgeting method, the zero-based budgeting method involves going through each item line by line to justify budgets and purchasing. This method is used to economize and minimize excess spending.

Compared to incremental budgeting where the budget is adjusted by a certain percentage across the board, zero-based budgeting assumes that everything starts off at zero. Then, every expense must be justified going up.

This is the best method to use if you want to keep your expenses as low as possible. However, it may take the longest to do. Because of how time-consuming it is, it isn’t the best for big corporations, but it can help small businesses survive and make ends meet.

Which is the best budgeting method for your business?

There really isn’t a “best” budgeting method, as what works for one company may not necessarily work for another. It depends on the size of your company, current finances, timeline, and goals.

Each method has its own strengths and weaknesses, so find one that aligns best with what your business needs.

Let Metrobank be your trusted partner in finding opportunities and solutions for your business. Talk to us today to learn more about how we can grow your business together.