The way your team manages its budget can determine the trajectory of your company. Misallocated resources can lead to disastrous results such as poor performing sales and marketing campaigns, bad customer service that results in a negative brand image, and underdeveloped products and services that don’t deliver results and don’t address your customers’ pain points. You’ll need to improve your budget management to avoid problems. One of the ways to achieve this objective is to identify the different types of budgeting methods at your disposal. Learn more about them so that you can implement the most effective for your company.

What are the different types of budgeting methods?

 

Flexible Method

This method includes the revenue that your business generates when you compute your budget. You can adjust the resources you allocate to match your revenue. This is a viable approach for companies that have seasonal shifts in revenue generation such as resorts, restaurants, souvenir shops, and other similar businesses. Their expenses change depending on the season. Their costs might soar during peak seasons such as summer and Christmas because of staffing and inventory needs. However, for this budgeting method to work effectively, your team needs to monitor your cash flow regularly. A dedicated team that tracks your operational costs enables you to identify where you can reduce spending and direct funds to profitable activities.

 

Value Proposition Method

One of the different types of budgeting methods is value proposition. The latter takes a measured and meticulous approach to creating a budget your company implements. It makes sure each expense and resource allocated delivers value to your organisation. This method’s objective is to maximise your cash flow and avoid inessential costs.

When you choose to implement this budget method, you should consider asking the following questions:

  1. Why should you include this item in your budget?
  2. What value does this expense, item, and/or service create for your employees, customers, and stakeholders?

Once you have the answer to the above questions, you can either add or remove an item in your budget.

 

Incremental Method

This method is what many companies implement because it is the simplest to use. It takes the previous year’s number then either adds or deducts a percentage of it to get a budget for the current year. This is an effective method if there are no variable costs or if the main costs remain unchanged every year. This budget method also comes with problems such as managers overstating the amount they need and team underperformance.

 

Activity-Based Method

One of the different types of budgeting methods is the activity-based method. You’ll have to consider and monitor all your company’s activities if they add value and if they contribute to your business objectives. This is a meticulous and time-consuming process; however, it allows you to identify ways you can reduce costs and increase efficiency. This method is suitable for businesses that require precise representation of their expenses and resource allocation.

 

Zero-Based Method

This method restarts your budget to zero at the beginning of each fiscal year. You have a clean slate which allows your teams to make a convincing pitch about the resources they need. They’ll have to make a case as to why you should give them the budget they ask for. They’ll need to provide a detailed list of expenses and show the value each one gives to your business. This thorough approach takes time and might require committees to make an informed decision.

 

Envelope Method

This simple budgeting method involves leaving a certain amount of money in physical or digital envelopes. Label each envelope based on the needs of a team. Your employees can just get the money they need in the envelopes. This approach requires a lot of guessing and following the previous month’s or last year’s budget. You might over or underestimate your budget with this method. Your team might run out of cash at an inconvenient time. This method’s simplicity is its main draw; however, this approach might be better for small businesses that don’t have six-figure or higher budgets.

 

When you plan your budget, you’ll need to balance the involvement of your teams and your overall goals. Not everyone will be happy with the final decision and the amount you allocated; however, you can find a middle ground that meets a bit of everyone’s expectations. Here are a few themes you can consider when you decide on implementing one of the different types of budgeting methods.

  1. Participative – this theme empowers employees because of their involvement in the process. They recommend objectives to management, pitch the amount they need, and provide insights into why they need the budget. They also discuss the value their planned activities give to your business.
  2. Imposed – this process (as its name implies) involves management imposing goals and a budget on the company. The people below implement the objectives the management imposes. They have to stay within the budget given to them. This approach might work best for companies that need to make difficult decisions and must hit specific objectives.
  3. Negotiated – this process combines a bottom-up and top-down approach. The management team identifies objectives they want to attain but they also share responsibilities and collaborate with middle managers and employees.

Identify which approach you think is suitable for your business and your objectives. You can change strategies based on the needs of your organisation. You can implement an imposed budget then change it to negotiated once you achieve certain goals.

 

Now that you know more about the different types of budgeting methods, you can implement one that suits the needs of your business. The method you choose can improve your resource allocation, reduce costs, and boost the efficiency of your activities. You can change budget methods if you think the one you implemented doesn’t give you the results you desire.

 

If you need assistance with accounting and bookkeeping, we at Robookkeeper can be your trusted business partner. We provide small business accounting services you can count on. Our team of experienced accountants can keep your accounting books updated, we can reconcile your bank accounts, process invoices, and set up Xero just to name a few services.

 

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