What is Incremental Budgeting?
Incremental budgeting is a budgeting method that involves adjusting the previous period’s budget for changes in revenue and expenses to create a new budget for the upcoming period. The budget is created by adding or subtracting a percentage of the previous year’s budget, based on expected changes in revenue or expenses.
How to Do Incremental Budgeting
To create an incremental budget, follow these steps:
- Gather the previous year’s budget: Gather the previous year’s budget and review it to identify areas that need to be adjusted.
- Analyze revenue and expenses: Analyze revenue and expenses to identify any changes that need to be made.
- Adjust the budget: Adjust the budget by adding or subtracting a percentage of the previous year’s budget, based on expected changes in revenue or expenses.
- Review and refine the budget: Review the budget and refine it as needed to ensure that it aligns with your financial goals and objectives.
Pros and Cons of Incremental Budgeting
Pros:
- Easy to implement and understand
- Takes into account past performance
- Provides stability and predictability
Cons:
- May not reflect changes in the business environment
- Can lead to spending on unnecessary expenses
- Can result in missed opportunities for cost savings or revenue growth