Be it the national space mission or your personal trip to Hawaii, Christopher Nolan's next movie or the children's programme at your apartment, the national economy or your household activities, everything requires a BUDGET. 

Budgeting is the process of allocating any resource, whether financial, human, or otherwise, to achieve a specific goal. In business, this process becomes more intricate due to the multitude of variables that must be considered. 

Over the years, the budgeting method has evolved as new challenges have emerged. Technology's impact on every area of business, including budgeting, can never be ignored. 

In this context, we have multiple budgeting methods and techniques today for various business organisations. Whether service or manufacturing organisations, fast-growing businesses or well-established global brands, each follows a budgeting method/technique that best suits its needs. 

FP&A managers play a critical role in budgeting by aligning financial resources with strategic goals, creating and monitoring budgets, and analysing variances. 

Let us look at the various kinds of budgeting methods that exist today. 
 

Traditional budgeting methods: 

Incremental budgeting: 

This is a traditional form of budgeting that involves adjusting the previous year's budget by a fixed percentage to account for changes. 

While this may be simple and ensure stability, there is potential for perpetuating inefficiencies and ignoring the need for comprehensive financial reevaluation. 

For example, if last year's marketing budget was $100,000, this year's would be an incremental increase of, say, 5%, making the marketing budget for this year $105,000. 
 

Zero-based budgeting: 

Zero-based budgeting improves on incremental budgeting by starting from a ‘zero-base’ each period, justifying all expenses anew rather than adjusting previous budgets. 

Unlike incremental budgeting, it focuses on needs and efficiencies. It is effective in cost-cutting scenarios and during organisational restructuring. 

For example, instead of allocating last year's $100,000 marketing budget, each expense is justified from scratch, potentially allocating either $80,000 or $120,000 if that’s what current needs demand. 
 

Rolling budgets: 

Rolling budgets are an improved version of incremental and zero-based budgeting. They involve continuously updating the budget, typically every month or quarter, to reflect actual performance and changing conditions. This approach provides greater flexibility, adaptability, and accuracy than static budgets, which remain fixed for a set period. 

A company revises its annual budget quarterly, incorporating the latest financial data and market trends. This ensures more accurate forecasts and responsive planning throughout the year. 
 

Modern budgeting techniques: 

Activity-based budgeting: 

Activity-based budgeting (ABB) allocates costs based on activities that drive expenses rather than historical data. 

This method identifies and analyses cost drivers, leading to more precise budgeting by linking resources to specific activities and outputs. 

For example, company budgets are based on the costs of production activities like machine operation, labour, and materials, ensuring each activity's expenses are accurately accounted for. 
 

Value proposition budgeting: 

Value proposition budgeting ensures that every budgeted expense directly supports the company's value propositions, which are the core reasons customers choose its products or services. 

This technique prioritises spending on activities that enhance customer value and competitive advantage. 

For example, a tech company allocates greater budget to R&D and customer support, directly enhancing product innovation and user experience, which are key components of its value proposition. 

This applies to small organisations aspiring to scale and yet to establish their USP in the market. 
 

Advanced budgeting strategies: 

Driver-based budgeting: 

Driver-based budgeting focuses on the key business drivers that significantly impact financial performance. Instead of using historical data, this method relies on the factors that drive revenue and costs, such as sales volume, market conditions, and production efficiency. 

Organisations can create more responsive and flexible budgets that adapt to changing business conditions by linking budget forecasts to these drivers. 

This approach allows for real-time adjustments and more accurate financial planning, as it considers the root causes of financial outcomes rather than just the outcomes themselves. 

For example, a retail company uses driver-based budgeting by linking its budget to key drivers such as foot traffic, conversion rates, and average transaction value. 

If foot traffic increases, the budget for inventory and staffing adjusts accordingly to meet anticipated sales growth. 
 

Scenario planning: 

You have heard of scenario planning in forecasting. What is scenario planning in budgeting? There is no difference. 

Once the team has identified the best-case, worst-case and most likely scenarios based on the impact of different variables like economic shifts, market changes, or operational disruptions, the FP&A team identifies risks and opportunities, allocates resources more effectively and creates contingency plans. 

In the weak economy scenario, it plans for reduced demand, adjusting production and staffing levels, while the strong economy scenario includes increased investment in capacity expansion and marketing. 
 
FP&A teams can choose the best budgeting method based on the organisation's needs. However, the FP&A manager must ensure that the method is as agile as possible to respond to uncertainties quickly. 

In today’s dynamic business environment, effective budgeting is crucial for organisational success. Budgeting methods and techniques have evolved significantly, providing FP&A managers with various tools to align financial resources with strategic goals, create and monitor budgets, and analyse variances. 

Traditional budgeting methods such as incremental, zero-based, and rolling budgets offer different levels of simplicity, flexibility, and accuracy. 

Incremental budgeting ensures stability but can perpetuate inefficiencies. 

Zero-based budgeting, by contrast, starts from scratch each period, focusing on current needs and efficiencies, making it effective in cost-cutting scenarios and organizational restructuring. 

Rolling budgets, which are continuously updated, provide flexibility and adaptability, ensuring more accurate forecasts and responsive planning.

Modern techniques like activity-based and value proposition budgeting further refine the budgeting process. 

Activity-based budgeting allocates costs based on activities driving expenses, ensuring more precise resource allocation. 

Value proposition budgeting ensures that every budgeted expense directly supports the company's value propositions, enhancing customer value and competitive advantage. This technique is particularly valuable for small organizations aspiring to scale and establish their unique selling proposition in the market. 

Advanced strategies such as driver-based budgeting and scenario planning introduce even greater sophistication. 

Driver-based budgeting focuses on key business drivers that impact financial performance, allowing for real-time adjustments and more accurate financial planning. 

Scenario planning helps organizations prepare for future uncertainties by creating multiple, plausible future scenarios. This method allows FP&A teams to identify risks and opportunities, allocate resources effectively, and create contingency plans. 
 

Conclusion: 

In conclusion, FP&A managers must select the most suitable budgeting method for their organisation’s needs while ensuring agility to respond to uncertainties quickly. 

The integration of advanced technologies and real-time data analytics can significantly enhance the accuracy and responsiveness of the budgeting process. 

By leveraging the right combination of traditional methods, modern techniques, and advanced strategies, organisations can achieve more accurate, reliable, and timely financial planning, ultimately driving better decision-making and fostering long-term success.