Three Different Budgeting Methods for Your Business
Did you know that just like using budgeting methods for your personal and household expenses, budgeting for a business can be done in more than one way?
Of course, some things are the same no matter what type of budgeting you choose for your business. You’ll still have to pay for things like your co-working space (if you use one). But other things are done differently depending on the business budgeting method you choose.
Here are three different budgeting methods for your business that you can consider.
This budgeting method uses your business’s current budget and adds a certain percentage, or increment, to it to arrive at the new budget.
For instance, if the monthly budget for your small business is $5,000, and allowing for inflation and other business expenses means you need to add another 5% to your budget, then your new budget should be $5,250. That’s an extremely simplified budget, of course, and it’s easy to figure and understand.
However, there are both positives and negatives to this type of budget.
- Easy to prepare, generalized budget
- Budgeting preparation costs are low
- Easy to understand
- Can reduce employee conflicts since all departments in a business have the same amount of money to spend
- Not entirely accurate budget
- Not entirely accurate budget
- Rigid budget does not allow for changing needs
- No employee incentives to reduce costs and increase profits and productivity
Zero-based budgeting, or zero sum budgeting, is a popular way that people budget for their own personal and household expenses, but it can also be used for a business budget too.
Budgeting in this manner examines in every cost of a business to ensure they are necessary. Every expense must be justified or else it is eliminated. This can result in a decrease in business expenses as budgets are slashed to the core.
Of course, costs could increase from this method as well. You might identify business needs that have previously been left unfulfilled, such as the the need for a new computer to make conducting business quicker.
Here are three steps to create your zero-based business budget:
- Identify needs and determine if there is another way to get the job done, such as outsourcing. Decide what is needed to perform job duties and examine business costs.
- Rank needs in order of greatest need to least. This will help with making the decision of where and how to spend money first.
- Put the plan into action.
This type of budgeting is exactly the opposite of incremental budgeting. It is harder to prepare, as well as being harder to understand. Zero based budgeting is detailed and more accurate. It also allows for changes in business needs, reduces overall costs, and can increase productivity.
For a large business, this type of budgeting may be unmanageable due to the time involved. A solution to this might be to use this type of budgeting every five years to ensure your business budget stays on track without taking the time and cost to budget this way on a consistent basis. Or, use it only in certain areas of your business on a consistent basis.
Top Down Budgeting
Top down budgeting is done from the highest level within a business. You, along with any upper management you might employ, look at the expense estimates and projected profits of your business and create a budget accordingly.
This method’s advantage is that as a business owner, you do not have to rely on others to give you budget information. This can save you time. But, if you are not intimately involved in the day-to-day operations of your business, you may not have all of the information necessary to use this budgeting method. This can result in over allocation of resources in some areas and under allocation of resources in others.
These are just three different budgeting methods for your business to choose from. You can see that each one is different and has advantages and disadvantages to your business. It’s up to you to decide which method might work best for your business.