‫In this section, we'll have an in-depth review of all three types of budgeting outside of zero based
‫budgeting.
‫There their advantages, disadvantages and how they are used.
‫Incremental budgeting With this particular method of budgeting, we are taking the current year's budget
‫and preparing it by making changes to the past year's budget, either by adding or subtracting based
‫on inflation.
‫Inflation can be described as the general increase in economic crisis over a period of time or time
‫can be as short as one day if compare to a supply and demand pull.
‫Historically, many companies monitor the economy over time to decide price increases for the upcoming
‫year.
‫So much of the new budget is based on inflated cost drivers.
‫I would like to give some real-life examples so that we can fully understand how incremental budgeting
‫works.
‫Let's take an example.
‫Based on someone's personal budget.
‫If they were using an incremental budget, of course, the next year, your budget may change if there
‫are cost of living increases associated with inflation, such as rent or higher utility bills.
‫If we're taking someone who has a real estate development company and they have a budget to create a
‫plain living community, this past year with the pandemic 2020 and all, we've seen many areas of inflation.
‫The price of lumber is one example.
‫So with the rising cost of lumber now we've seen the housing market prices soar, therefore creating
‫a higher price for new homes that are on the market due to increased cost of lumber.
‫And if we're looking at this from a monetary value, let's take
‫for instance, last year, your project budget was $1 million for this year, the expectation as an
‫increase of 10 percent and project cost.
‫Therefore, the budget is now $1.1 million, so we're adding on 10 percent or one-hundred thousand to the original
‫budget of $1 million.
‫Incremental budgeting as a common approach in business where management doesn't necessarily intend to
‫spend a great deal of time formulating budgets, nor do they see a need for there to be a thorough review
‫or re-evaluation of the business.
‫Many projects choose this approach if
‫no new assessments are needed.
‫From an operational standpoint, with this particular approach, there are, of course, advantages
‫and disadvantages.
‫Some advantages of incremental budgeting is really the simplicity of it.
‫The primary advantage of incremental budgeting is that it's based on recent financial results, and
‫the recent budget can be readily verified.
‫There's, of course, funding stability.
‫Typically, when you're looking at a particular budget from an incremental point of view, if a program
‫requires funding for a multiple period of years, incremental budgeting is structured to ensure the
‫funds will keep flowing into the program.
‫Seeing as how we're not only adding onto the budget based on inflation or also taking on a percentage
‫based off of that amount that was spent in the previous year.
‫Incremental budgeting allows for consistency with the dependence you have the number of budgets in prior
‫periods.
‫It's really ensure that the budget will remain consistent and stable over a period of time.
‫The incremental budgeting process is based on all of the allocation from the previous period.
‫Sometimes this approach can be a bit misleading, since it does not take into account some of the changing
‫circumstances which are immediate.
‫Those instances where people tend to spend at the current budget and have estimation for the next period
‫really brings about the phrase use it or lose it.
‫Disadvantages.
‫There are many disadvantages when it comes to incremental budgeting.
‫Let's evaluate a few.
‫Wasteful spending is a huge disadvantage.
‫Incremental budgeting since much of the New Year's budget is based on the previous year's spend.
‫There are times where projects or programs will tend to find ways to use.
‫The rest of the money does not necessarily allocate it with their overall program goal to ensure they
‫have the same amount of money, or at least that increase within the next year's budget.
‫Efficiency is definitely reduced when we're thinking about incremental budgeting.
‫Now there's not necessarily a reward for cost cutting or improvements, as we budget will automatically
‫increase every year based on inflation.
‫So it's not necessarily one of those items that are program manager can take back and say, Hey, we
‫saved the company money.
‫When this particular budget is always increasing. The incremental budget really doesn't take into account
‫the immediate change.
‫The method is based on the idea that expenses were run as they did before and within certain programs
‫and projects.
‫Of course, we're thinking about innovative programs, especially technology.
‫A cost is constantly changing.
‫Services are constantly changing.
‫What the options are that we're choosing are constantly changing.
‫So thinking about these different variables and what the cost of those variables will be.
‫This budget does not take into account if we're adding in a new variable component into a particular
‫program or project.
‫And finally, it's more use it or lose it of funds in this particular budgeting format are not carried
‫over into the next year.
‫Say if you have a program budget for $500,000 and the program only uses $400,000 at the end of the fiscal
‫year, the rest of that money is swapped out and one corporate accounting looks at the numbers for next
‫year's budget.
‫There are think that there really wasn't a need for that additional $100,000.
‫So one particular area may cost your budget to actually be reduced or certain cost components.
‫Let's review a sample of an incremental budget.
‫And the attached handout, you will find a template in a sample for an incremental budget.
‫Use these to review the drivers what you may see in an incremental budget.