Are you following the right budgeting model?
A One-size-fits-all is an occasional solution in business and certainly for budgeting. Drafting a budget requires goal, vision & strategy aligned with organization mission. Organizations build a budget to set an expectation regarding future revenue & margin, which in turn becomes performance indicators for the operations head and also to take sensible strategic decisions, to strive in a competitive environment. However, amongst varied budgeting models, an organization has to choose the most effective and visionary model, keeping in consideration the environment in which a certain organization operates.
Below are four budgetary models which are widely used by organizations as per their requirement.
The Incremental budgeting model is one of the easiest and traditional methods of budgeting. It adjusts the existing run-rate by increments to show the growth or decline of the business. For Example, you may increase/ decrease from last year actual revenue basis past trends and will reach out to budget. However, such a budget is likely to result in budgetary slack, wherein, managers may not provide correct insights into operations. It also excludes external drivers, such as high inflation or pandemic scenario etc.
Zero-Based Budgeting calls for line-by-line justification of revenue and purchases. Also, zero-based budgeting is used to economize & trim the cost budget for excess spending. If compared, incremental budgeting increases or decreases across the board, however, zero-based budgeting assumes that each department starts at zero. Each department needs to justify each spending and building a budget from the scratch.
Zero-based budgeting is the best method to eliminate extra spending, but an exhaustive process at the same time. Complete visibility in budgets provides conscious spending and saving. Zero-based budgeting is most effective for savings goals.
Value Proposition Budgeting:
Value proposition budgeting focusses that everything in the budget delivers value for all the stakeholders of the business, i.e. Customer, staff, investors. Value proposition budgeting focusses on avoiding unnecessary expenditures, however, expenditure is not precisely aimed like zero-based budgeting goals. Budgets are itemized and thereafter justified to prove value for the business, eliminating cost that does not bring value and maximizing the budget to deliver strong results. Value proposition budgeting can also be used in alignment with other budgetary models, such as activity-based budgeting, on a small or large scale. However, value proposition budgeting sometimes becomes difficult to quantify as the value offered by multiple departments or initiatives can change rapidly.
The activity-based budgeting method is a top-down budgeting approach and the mentioned model is focused on the result an organization wishes to achieve. For example, if an organization is seeking valuation or is targeted to achieve a turnover of XXX million, the budget would be computed backwards to analyze the activities which will create that desired effect and will proceed accordingly.
Activity-based budgeting is enormously effective when an organization has goal-oriented strategy.
There are other budgeting models as well like rolling budget, flexible budget etc. which aren’t commonly used but few organization use as per its industry & market conditions to achieve its mission.
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