When it comes to budgeting, there are many different methods to choose from. Each method has its own advantages and disadvantages, so it's important to understand the different approaches before deciding which one is right for you. In this article, we'll discuss four of the most popular budgeting methods: incremental budgeting, activity-based budgeting, zero-based budgeting, and the envelope system. We'll also discuss the 50-20-30 method and how it can be used in combination with other budgeting methods.
The incremental budgeting method is an excellent choice for companies whose costs are more predictable and tend to be similar year after year. This approach is simple and straightforward, as it uses actual figures from the current year to create the budget for the next period. However, this method may not sufficiently analyze each item or category of the budget. The activity-based budgeting method takes a top-down approach that focuses on the key results a company wants to achieve in the coming period.
This method is ideal for companies that may not have enough historical information to create a budget for the next period, such as newer companies that are growing. Zero-based budgeting is a zero starting point or blank slate. This approach is ideal for companies that are innovative and seek to function more efficiently. However, some critics argue that the benefits of zero-based budgeting don't justify its time cost.
The value proposition budgeting method is a midpoint between incremental budgeting and zero-based budgeting. This approach is not for all companies, but when executed correctly, it can generate profits, create value for your brand, and build customer loyalty. The envelope system is an outdated approach to budgeting that is usually based on cash in physical envelopes. This method works by allocating a certain percentage of your income to different goals or categories.
For example, if you have a large debt or a small emergency fund, it may make sense to allocate more than 20% of your budget to those goals while reducing discretionary spending at the same time. The zero-based budgeting method works in a similar way to the envelope system, but with a couple of key differences. First, you don't have to use envelopes to keep track of your money, and secondly, you're not limited to using cash. The main concept behind a zero-based budget is that you give every dollar you earn a purpose; in the end, your monthly expenses should equal your monthly income.
The 50-20-30 method is very simple to maintain and can be used in combination with other budgeting methods. This approach works by allocating 50% of your income towards essential expenses such as rent or mortgage payments, 20% towards savings and debt repayment, and 30% towards discretionary spending such as entertainment or dining out. When deciding on a budgeting method, you must consider the needs of your company and your objectives for each budget period. Each method has its own advantages and disadvantages, so it's important to understand them before deciding which one is right for you.