G'day it's Justin Hogg here from Right Source welcome back we're talking
everything budgets again. Now I've done a couple of posts previously on
incremental budgeting and what incremental budgeting is in essence is
taking last year's results using those to create your budget for the next year
it's a reasonably quick process and I suppose what I wanted to take you
through is what the advantages and disadvantages of that process are now
obviously in comparison to what. The other way you can do budgeting is called
zero base budgeting which is basically we take a blank page and start
from there so it's building your budget from a zero base from scratch now that
is a much more involved process but also has some advantages so what I wanted to
do today was really focus on incremental budgeting and what that provides in
terms of advantages and using that process but also some of the pitfalls
and things you need to look out for when using that process so let's dive in.
Some of the advantages, well the reason why incremental budgeting is very
popular is it doesn't take much resources to do so because you're
getting last years and you're basically making minor additions or modifications
to that it's quite quick, you can do it very very easily and it doesn't take a
team of people to do and I think the video I did we were able to do an
incremental budget for a business in ten minutes so that doesn't take very long
so that's one of the first key advantages. It also doesn't require a
very detailed knowledge of how the operations are working because you're
looking at high-level results you don't need to know well, if my business is
providing a product how's it built, what are the steps in building the
process, how you sell it, where do you market it you don't need to know that you
just need to know, well these are the results in terms of how much the scale
of the business costs and gets in terms of revenue and you can basically use
that to do your budgeting so you don't need to spend a lot of time in the
business talking with people and getting to understand the intricacies of the business.
Because again it's also at a high level there's not a lot of data you're putting
together so you don't have to create a massive spreadsheet with multiple tabs
and lots of inputs it's really quite simple so that way the data isn't hard
to manage it also doesn't require a software program to do it
it's relatively easy to do in Excel I'm not always a big fan of saying you should
do stuff in Excel because stuff can go horribly wrong in Excel but incremental
budget because it's simple is actually well-suited to being done in Excel
the last advantages of doing your incremental budget is in terms of
iterations now what I mean by that is when you do a budget and you get to the
final number sometimes that number isn't what you
want so you want to go back and revisit it incremental budget allows you to do
those revisits or the budgets or tweaking to see where you've landed and
that paints a picture of what you want the future to be is correct it's
actually quite quick to be able to do again because there's not very much data and
it's been done at a relatively high level. So they're your advantages of
incremental budgeting really it's about ease-of-use and simplicity disadvantages are
going to be the disadvantages of doing things at a high level so and not
getting involved in the business so the first one is because you're not diving
down into why things are being spent especially spent and revenue or how
that's happening you're not really questioning whether last year's was
right or whether it should change so from that point of view there's a couple
of things that flow from that one you're not understanding the why for costs
But that then comes down to we can't challenge it so it's very hard to
have a conversation around well we should reduce our expenditure on
advertising well that's what we spent last year so
we're spending that this year how can you have a conversation a meaningful
conversation about what a reduction in that cost would mean or what
benefits you're getting for spending it so that's one of the disadvantages is
hard to really challenge some of that that expenditure. Where you're wanting to
have that drive for efficiencies and challenge that cost it doesn't
allow for that so it doesn't really encourage those who are preparing a
budget to look for efficiencies it's really get last year copy/paste there's
not a whole lot of challenging and thinking about do we need to change
stuff and also with that copy/paste mentality to an extent if your business
is making shifts in terms of its size and scope changing how it's doing
operating that stuff can get overlooked if you've not really been thinking
about what what does the change of the business gonna mean from one year to the
next so again it's that detail that understanding of the business and also
those preparing it, if you're a larger business than you're doing an
incremental approach and you've got a business manager doing a budget for that
area and they're just getting last years and putting it into this year's so is
the question really for them is does the budget have any meaning for them like
because they want to be telling well this is what I'm doing did the numbers
really reflect that for them do they feel engaged in the budget process so
that's that's that's probably another issue that you must look at is how much
engagement you get from your staff because you're not diving into the
business its high level the last of the disadvantages of using incremental
budgeting relates to making sure everyone's using the same assumptions so
what is the budget based on. High-level again people are putting it together
based on their thoughts and and really not getting to a lot of detail so it's
hard to know if especially if you've got multiple people doing multiple parts of
it if they're using the same assumptions this also then comes out when you start
doing some reporting against it because those assumptions that are in the budget
aren't necessarily super clear if they're variances between what you've
budgeted and what actually happens to know why there's a difference because
you don't know the detail or the why of the budget it doesn't necessarily give you the
why for the actuals now that's not bad because it does show you there's a
variance which shows you need to look at it it just doesn't give you a lot of
information to start with that's the advantages and disadvantages
of incremental budgeting now the obvious question is which one will I use well it
depends I actually use both incremental budgeting and zero based budgeting based
on the circumstances and quite often within the same budget process now
there's a another video about that which I'll talk to you later about in terms of
how you run an annual budget process plus also there's some other videos
we've got in terms of incremental budgeting both if you want a simple P&L
budget there's a template there's a video you can watch on it plus we'll
also have a similar budget but also including a balance sheet workout so you
can look at those feel free to subscribe if you want some help with your
budgeting also just chuck your details in below there's a link you can put your
details in and in the description just tell me what you're after
and I'm happy to make contact otherwise connect with me on LinkedIn but look
forward to seeing you next time and it's Justin Hogg from Right Source.