The two most common methods of budgeting are incremental budgeting and zero based budgeting (ZBB).

Incremental budgeting
Incremental budgeting involves preparing budgets by adding or subtracting incremental amounts to past financial performance or historical data.

Advantages of incremental budgeting

  • Promotes consistency and certainty
  • The budget is stable and change is gradual
  • Allows for comparisons and variance analysis on a time basis
  • Departments can prepare their budgets quickly and efficiently
  • Aids long-term planning

Disadvantages of incremental budgeting

  • Past budgets or data may be incorrect and/or out of date
  • May lead to a ‘spend it or lose it’ attitude
  • Fails to take into account the changing social enterprise environment and marketplace
  • Can inhibit change and innovation
  • No incentives to reduce costs
  • Assumes the social enterprise or department will operate in the same way

Zero Budgeting (ZBB)
Zero Budgeting budgets are prepared from new data and are not based on previous performance or historical data.

Advantages of ZBB

  • Prevents basing budgets on incorrect historical data
  • Budgets are based on future needs
  • Encourages managers to look for alternatives and cost effective ways to improve operations
  • Managers or departments are forced to research and justify their budgets
  • Develops a questioning attitude

Disadvantages of ZBB

  • It is time consuming as new data collection and research are required
  • Valuable historical data are not taken into account
  • All costs and estimates need to be researched and justified
  • Can result in uncertainty and conflict