Approaches to Budgeting

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Traditional budgeting and alternate approaches

Mei Po holds up two different kinds of budget spreadsheets.

Many organizations use a "traditional" budget—a budget that covers a one year period and presents forecasts that do not change during the life of the budget cycle. Companies use traditional budgets because they are easy to put together and simplify coordination of budget assumptions across different departments.

Traditional budgets, however, have been under growing attack from those who feel that they no longer serve a modern organization's needs. Critics complain that budgets are timed incorrectly (too long or too short); rely on inappropriate measures; and are either too simplistic (or too complex), too rigid (inflexible in a changing business environment), or too political (the incentives for managers send the wrong messages).

As a result, some organizations blend alternative approaches to budgeting to meet their individual needs. The table below shows the elements of a "traditional" budget and some alternative approaches to budgeting that your company may use.

Traditional budgets and alternative approaches

Budget Parameter

Approach

Description

Time period of the budget

Fixed budget

(traditional)

The budget period is a specific time period, usually coinciding with the company's fiscal year.

Rolling budget

The budget is continuously updated so that the time frame remains stable while the actual period covered by the budget changes. For example, as each month passes, a one-year rolling budget would be extended by one month so that there would always be a one-year budget in place.

Forecast values

Static budget

(traditional)

Presents one forecast for a given time period and is not changed during the life of the budget.

Flexible budget

Budgeted revenues and costs are adjusted during the budget period according to pre-determined variances between the budgeted and actual output and revenue.

Forecasting process

Incremental budgeting

(traditional)

The previous period's budget and actual results, as well as expectations for the future, are used in determining the budget for the next period.

Zero-based budgeting

The budgeting process begins from the ground up, as though the budget was being prepared for the first time.

Setting goals

Top-down (traditional)

Senior management sets budget goals—such as revenue and profit—and imposes these goals on the rest of the organization.

Participatory

Those responsible for achieving the budget goals are included in setting those goals.

 While the alternative approaches may result in greater accuracy and functionality, some can consume so much time that they distract managers from other critical activities.

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