Rising costs and uncertain markets have become significant challenges in today’s business landscape, making it crucial for organizations to reassess their financial strategies. As the year 2025 has come and gone, and many of you are closing the books and wrapping up the year, this is a pivotal time to start thinking about creating a budget for the new year, if you haven’t already. A great way to begin this process is to schedule a budget review meeting or gather last year’s financial data as a first step. These actions will help you move from reflection to concrete planning.
A budget is a fundamental financial management tool for business success. For business owners, executives, and managers, budgeting is a key skill for ensuring organizations and teams have the resources to execute initiatives and reach goals. So, how do you know which budget is the proper budget for your organization?
When selecting the appropriate budgeting method, consider various factors such as company size, industry, and growth stage. For example, incremental budgeting might suit established companies with stable financial histories, while small startups looking to prioritize innovation may benefit from zero-based budgeting. Organizations in industries with fluctuating inputs might find activity-based budgeting advantageous, and those focused on maximizing perceived value could opt for value proposition budgeting. Tailor your choice of budget type to best align with your strategic priorities and financial capabilities.
The Incremental Budget
The incremental budget is most commonly used because it is simple and easy to understand. The incremental budget uses historical data and adds or subtracts a percentage to create the budget for the upcoming period. For instance, if last year’s marketing spend was $1 million, a 3% increase would bring the new budget to $1.03 million. It is the appropriate budget to use if the primary cost drivers do not change from year to year.
The Activity-Based Budget
The activity-based budget identifies the inputs needed to achieve the organization’s goals or outputs. For example, if an organization sets a revenue target of $5 million, it must first determine the activities required to reach that goal and then calculate the costs of performing those activities.
The Value Proposition Budget
Value proposition budgeting assumes no line item should be included in the budget unless it directly provides value to the organization. So, when utilizing this budget, you, the budgeter, will consider the following questions:
- Why is this amount included in the budget?
- Does the value outweigh the cost? If not, how is the amount justified?
- Does the amount create value for customers, staff, or others?
The purpose of value proposition budgeting is to avoid unneeded expenses. Organizations use value proposition budgeting to strategically align spending with customer-perceived value, guaranteeing funds are allocated to high-impact areas that drive revenue, customer satisfaction, and competitive advantage. Remember: Spend only where customers notice, cut where they don’t. This concise focus helps solidify the importance of aligning budgetary decisions closely with customer expectations.
Zero-Based Budget
Zero-based budgeting starts each period by setting every item to zero dollars before reallocating funds. In this method, every expense must be justified for the new budget period, and only necessary costs that add value are included. Essentially, you are creating a rigorous budget from scratch. Zero-based budgeting is best suited for addressing discretionary costs rather than essential operating costs, so it is not necessarily the best choice if you are in a time crunch. Implementing zero-based budgeting can be time-intensive and may face resistance from staff accustomed to traditional budgeting methods. Overcoming these challenges involves setting clear objectives, ensuring staff understand the benefits, and providing training to make the transition smoother.
No matter what type of budget you choose, it is essential to review and adjust your budget quarterly or monthly. This regular check-in helps maintain a practical rhythm for financial oversight, ensuring that any necessary adjustments are made in a timely manner. The budget process has been proven to provide a solid method for tracking actual performance and comparing it to planned performance. A reasonable budget helps you understand where your money is going, make intelligent decisions, and prepare you for the future. As always, please seek advice from a trusted advisor who can assist you with your budget process.
Angela Pinion is an Accounting Services Manager at Schmersahl Treloar. She can be reached at 314.966.2727.