According to a 2021 survey by the National Foundation for Credit Counseling, 56% of the general population did not have a budget. While everyone struggles in the absence of budgeting, the survival rate of businesses can take a hit in the absence of the same. Why? Because lack of budgeting makes it hard for decision makers to get a clear idea of cash flow and the same leads to wrong spending decisions.
That’s why Finsmart Accounting – trusted globally for outsourced accounting services in India – will share top 11 methods of budgeting for effective financial planning and forecasting.
Let’s start with the most popular methods of budgeting for businesses!
Methods of Budgeting
Below are the top budgeting methods and techniques used by businesses and organizations for effective financial planning:
1. Incremental Budgeting
One of the most commonly used budgeting methods, incremental budgeting represents the simple technique of adding or deducting a percentage from the last year’s figures. This technique for budgeting is best for small businesses since it requires limited accounting knowhow and is rather easy to execute.
Incremental budgeting technique simply takes the expense list from the previous period (quarter or year) and make changes based on projections.
2. Activity-Based Budgeting
Activity-based budgeting records and analyses all business activities that could cost money. Every business activity that costs money is analysed to find possible ways for reducing costs and increasing profitability. Complex in comparison to incremental budgeting, this budgeting technique helps organizations in checking expenses on unnecessary activities.
Activity-based budgeting is commonly used by companies active in construction, healthcare, and manufacturing industries to eliminate extra expenses.
3. Zero Based Budgeting
Zero-based budgeting was introduced by Peter Pyhrr in the 1960s. In this budgeting method, managers have to justify every expense without taking reference from the previous year’s numbers.
Zero-based budgeting technique is time-consuming as every expense is looked into without support from previous data. This budgeting technique helps in cutting down unnecessary costs and zero down on critical expenses only.
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4. Value Proposition Budgeting
Also known as priority-based budgeting, value proposition budgeting technique is used by businesses to ensure that every expense included in the budget is delivering value to the business. This is done by going beyond the numbers and looking at the value added.
This budgeting technique works best for businesses that are more conscious about their budget and want to cut unproductive expenses. However, it sometimes becomes hard for businesses to decide what is important. That’s because requirements and needs change over the passage of time.
5. Flexible Budgeting
Flexible budgeting is good for seasonal and young businesses that depend on worker availability and revenue inflow. This budgeting technique is deployed by businesses that face big highs and lows during the peak seasons. Businesses using flexible budgeting techniques have to adjust their income and outcome according to sales and staff.
Adjusting costs and making changes in the budget help business owners remain competitive and profitable in the long run. However, this budgeting type can be time draining.
6. Envelope Budgeting
This budgeting method is perfect for very small businesses that operate with a small budget (mostly in triple digits) rather than a big one. Modern businesses create digital envelopes for managing cash for different aspects of the business.
Envelope budgeting technique helps in saving the time spent on taxes as businesses already have a record of how much cash is spent on which aspect of the business. Pretty simple budgeting method if you ask us!
Other Popular Methods of Budgeting
Above are not the only budgeting methods though. Here are some popular budgeting methods and techniques used by individuals and micro businesses:
- Pay-yourself-first budgeting
- 50/30/20 budgeting
- 80/20 budgeting
- 60% solutions budgeting
- No budget budgeting
We hope that the above insights helped you learn about the best budgeting methods for effective financial planning. It is best to choose a budgeting method based on your business needs, size, and goals.
Not sure which budgeting method is right for you? Connect with budgeting experts, tax attorneys, or your accounting professionals like Finsmart to choose the right budgeting method.
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Want to learn more about methods of budgeting or discuss your business accounting goals? Email us at firstname.lastname@example.org to get a reply from our accounting and finance experts.
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Shalaka Joshi is the founder of Finsmart Accounting and operates in the capacity of Director. A Chartered Accountant passionate about outsourcing and problem-solving, Shalaka has more than 20 years of experience in the field of accounting, payroll and MIS reports.