Budgeting Essentials
Zero-based budgeting
START from
scratch. Managers
must be able to justify
every single expense.
No expenditures are
automatically
“okayed”. Zero-based
budgeting is very tight,
This kind of bottom-up
budgeting can be a
highly effective way to
“shake things up”.
Cost containment, for
example, in a situation
where a company is
going through a
financial restructuring
or a major economic or
market downturn that
requires it to reduce
the budget
dramatically.
Zero-based budgeting
is best suited for
addressing
discretionary costs
rather than essential
operating costs.
However, it can be an
extremely timeconsuming approach,
so many companies
only use this approach
occasionally.
Zero-based budgeting
Incremental budgeting
Takes last year’s
actual figures and
adds or subtracts
a percentage to
obtain the current
year’s
budget. However,
there are some
problems with
using the method:
REPEATED
inefficiencies. For
not putting effort
into seeking ways
to cut costs or
economize.
a manager might
overstate the size
of the budget that
the team actually
needs so it
appears that the
team is always
under budget.
ignore external
drivers of activity
and performance.
For example,
there is very
high inflation in
certain input
costs. and simply
assumes the cost
will grow by, for
example, 10% this
year.
Incremental budgeting