incremental budgeting

What Is Incremental Budgeting

There are many important aspects of workflow in a company, with asset management at the top of the list. It is important for today’s managers not only to competently manage current assets but also to apply best practices and strategies for their management. Many modern companies use incremental budgeting techniques for more thoughtful asset management. In our article find out what is incremental budgeting and what are its features of companies.

What is the essence of incremental budgeting?

To put it simply, incremental budgeting is the process of developing a corporate budget by making small changes to the current corporate budget. It does not involve the development of a new asset allocation and management system – the main items of the current budget remain relevant. Only minor changes are made to them, which correspond to the current goals and directions of the company’s development.

This approach to the formation of the corporate budget has some advantages:

  1. Simplicity. It is not necessary to have the special financial knowledge to maintain an incremental budget – it is enough to enter actual figures into the main articles, without changing the basic structure and the number of profit and expense items.
  2. Stability. The effectiveness of such a system of budgeting can remain unchanged over a long period. Thus practically in any working conditions, the budget will be characterized by consistency and actuality.
  3. Regularity. Incremental budgeting assumes that all its items will have approximately the same amount of funding, which makes it possible to distribute assets evenly for the benefit of the entire company.

Incremental budgeting is rightly considered one of the most traditional techniques of drafting and maintaining a corporate budget. However, this does not affect the effectiveness of its use in various companies.

Can we call incremental budgeting a comprehensive budget?

An incremental budgeting system covers all aspects of the company’s activity with a further equal distribution of resources. However, in the modern conditions of development, such a system of budgeting may be insufficient. It is not surprising that the incremental budget is met with more and more criticism. In addition to the lack of flexibility, experts also point to other disadvantages of this budgeting system:

  1. Hostility to innovation. Allocating assets to the same budget lines do not facilitate the introduction of new practices and technologies into the work of companies, because there are no corresponding lines in the corporate budget for them.
  2. Inconsistency with the changing conditions of the company. A rigid list of items in the incremental budget does not make it possible to change it quickly and adapt it to the new conditions of the company, which may reduce the effectiveness of its work as a whole. In this case, the company becomes vulnerable to any unforeseen situations, since its budget does not contain additional assets.
  3. It does not promote the thoughtful use of assets. In the incremental budget, only the asset figures change from year to year, while the main items remain unchanged. However, no structural department of the company can use the resources of the company only for the implementation of some specific goals, because their needs are constantly changing. As a result, the company is forced to waste more resources.

On the one hand, the stable structure of the incremental budget covers almost all aspects of the company’s life, but they are not all-encompassing in their entirety. Practice testifies that the incremental budget gradually becomes irrelevant to modern companies.