What is incremental budgeting and why implement it in the company?
Incremental budgeting is a strategic approach to taking care of the company’s finances. Through it, it becomes possible to anticipate costs and simulate scenarios in order to guarantee the achievement of the business’s strategic objectives.
Incremental budgeting is one of the methods available that offers more agility. To understand how it works and what are its advantages and disadvantages, keep reading this post!
What is the incremental budget all about?
Among the ways of doing business budgeting, incremental budgeting can be considered the easiest to apply. This is because its basic principle is quite simple: to assemble a budget, the company uses the last budget as a reference. The only change, in this case, is the readjustment of values based on inflation and other monetary correction indices.
How can it be useful in a company?
Due to its simplicity, the incremental budget is very useful, as long as it is applied in the right context. Thus, it is not a guarantee of success by itself, and its implementation must be carefully evaluated so that the positive effects are perceived. See some advantages!
More agility in budgeting
Another feature of this budget assembly strategy is that it is top-down. Therefore, it is determined by the company’s top management and must be complied with by the lower levels. In this way, managers, supervisors, and other intermediate-level professionals are exempt from presenting specific budgets for their sectors. This speeds up the approval and application of the new budget.
Lower Execution Costs
Incredibly, creating a budget also comes at a cost, although free resources like budget spreadsheets can make the process cheaper. After all, the biggest cost involved in this process is still related to labor, and as in the case of the incremental budget there are not so many professionals involved, these costs decrease a lot and even cease to exist.
Are there any downsides?
As with everything in life, there is always the other side of the coin to consider. Furthermore, to be effective, the incremental budget needs to be applied very carefully. Otherwise, it can even generate budget discrepancies, as it only takes past data as a reference. Therefore, we highlight below two possible disadvantages that should be placed on the scale. Follow up!
Projections can be superficial
The s indicators generally take as their starting point the current situation in which the company operates. If your business is guiding its activities through the indicator management approach, the incremental budget may not be as effective, as it is 100% based on previous budgets.
The reduction of thinking heads in the process
Although the top-down model provides more agility, on the other hand, it can be too lean, as it takes people who are on the front lines out of the decision-making process. Thus, top management runs the risk of ignoring data that would be relevant to building a more accurate budget.
How to implement it?
When opting for the incremental budget method, the steps to be adopted are generally:
- Data verification;
- Classification of values;
- Adjustments to values;
- Provision of projections to those responsible for each area so that they can be validated;
- Consolidation and generation of the business budget.
However, first of all, it is first necessary to study all the methods available to choose the one that makes the most sense for the company considering the availability of resources – whether they are directly financial (investment need) or qualified labor, and the management model of the company.
It is also necessary to consider some other important variables in the preparation of the corporate budget, such as: Who will be responsible for preparing and managing the budget? What will your data sources be? Do responsible professionals need training? What tool will they use?
Advantages of Incremental Budget
When analyzing the budget preparation process according to the incremental methodology, the following advantages can be observed:
- Greater agility and speed in budgeting. In this process, there is no detailed examination of the various expenses of each of the units that make up the company, reducing the time spent on analysis. In addition, as projections are generally prepared in a top-down manner, there is an alignment of the projections with the expectations of top management, avoiding that several revisions have to be carried out to achieve the expected macro result;
- Lower execution cost involved in the process. Directly related to agility and speed, there is a lower cost involved in the process, as it does not require the engagement of area managers for several hours over the months consumed in the budget process. This is a normal routine in other methodologies and it generates a high cost;
- Release of area managers for their core activities. By requiring less commitment from managers in preparing the budget, since most of the work is carried out by a central area, time is freed up for them to focus on their specific areas. This is a common criticism of companies that use other budget models because, according to them, managers should concentrate their efforts on what they were intended to accomplish and the high work consumed in the budget preparation and review ends up being a deviation in the focus of action.