Types of Budgeting Styles for Businesses

Why Budget?

A budget is a plan that helps individuals and businesses manage their money. It lets you determine how much money you get, spend, and save. Making a budget can help you balance your income or revenue with your savings and expenses and work towards a bigger objective. It addresses such questions as where your money and investments are going, how much you can afford to spend, and how to reduce it to maximize your profits.

Business budgeting styles and the Canadian context

Budgeting is critical for Canadian businesses to succeed and ensure sustainable growth in a unique economic landscape. Including factors that could impact their operation, like the rising inflation, interest rates, the labor market, and issues within sectors such as housing.

Given the different styles of budgeting that exist in the business world, it can be challenging to pick the right fit. Thus, this article explores different budgeting styles Canadian businesses can adopt to enhance financial control, improve decision-making, and foster long-term success.

Budgeting Styles for Businesses

Activity-based budgeting

In Activity-based budgeting, an organization determines the input or spending required to meet the target output. The budget is aligned with specific operational activities, allowing for a more accurate allocation of resources. This style is beneficial for businesses with diverse product lines or services. ABB helps identify and prioritize activities that contribute the most to the organization's success, leading to better resource utilization.

Activity-based budgeting (ABB) aligns well with the needs of Canadian businesses in sectors such as mining, technology, and manufacturing, where understanding and prioritizing activities are crucial for success.

Incremental budgeting

Incremental budgeting builds on existing budgets from previous quarters or fiscal years, reducing the workload in creating a budget. An expense list from a pre-determined period is analyzed and then adjusted based on projections for higher costs in the coming year, predicted revenue growth, etc. Adjustments can also be made based on how under or over-budget a business performed previously.

Incremental budgeting is a popular choice for smaller Canadian businesses because of its simplicity and less reliance on the accuracy of numbers.

Value proposition budgeting

Value proposition business is about ensuring the maximal returns for any given expense. This means asking questions like Why an amount is included in the budget, if an item creates value for its customers and stakeholders, or if the cost of an item outweighs its value.

Zero-based budgeting

The Zero-based approach works under the principle of starting with a new budget for every fiscal year or at the start of each quarter. Nothing from the previous year is automatically carried over.

In essence, departments pitch their expenses, making their case for all costs and why those expenses are essential to the company's success. This process can take time, and you may need an expert or even a committee to help make the right decisions on each pitch. But, the result will be a detailed budget that should limit frivolous expenditures and give you more money to allocate as needed.

Zero-based budgeting (ZBB) can be particularly effective for Canadian businesses looking to enhance cost efficiency. In a fiscally responsible business environment, ZBB encourages organizations to justify every expense from scratch, aligning well with Canada's focus on sustainable economic practices and corporate responsibility.

Flexible budgeting

As its name suggests, flexible budgets are adaptable, changing to match your revenue. This can be a robust approach for businesses that don't expect consistent revenues.

Flexible budgets can be best for businesses with big swings in revenue through market conditions and seasonal demands.

The Canadian market experiences seasonal fluctuations, particularly in sectors such as tourism and agriculture. Flexible budgeting, which adjusts for variations in activity levels, is well-suited for businesses affected by seasonal changes.

Involvement in the budgeting process

Now that we've covered the most common budgeting styles, we can segregate them further based on their processes. Budgeting can be a top-down process where the upper echelons impose goals that resonate with their vision or, alternatively, involve all stakeholders for a bottom-up approach. Some common approaches include:

Imposed budgeting

Imposed budgeting is top-down budgeting, where the upper management will form a budget based on the company's goal and mission, and the lower management will handle the execution.

This type of budgeting is more efficient and accessible, cheaper and faster, and gives more control to the upper management.

Negotiated budgeting

Negotiated budgeting is a combination of both top-down and bottom-up budgeting methods. In this practice, executives may outline some of the targets while at the same time sharing responsibility for the budget preparation with managers and employees. This increased involvement helps employees feel like they have a personal stake in the success of the budget plan.

Participative budgeting

Here, employees work from the bottom up to recommend targets to the executives. The executives may provide some input while factoring in the recommendations given by department managers and employees who are afforded more freedom in setting up the budget.

Conclusion

Choosing the right budgeting style is crucial for businesses to achieve financial stability and long-term success. The effectiveness of a budgeting style depends on various factors, including the industry, market conditions, and the organization's size and structure. Combining elements from different styles or adopting a hybrid approach can also be a strategic way to tailor budgeting practices to specific business needs.

The Canadian context also introduces specific considerations and unique dynamics of the Canadian market. Ultimately, a well-designed budgeting strategy not only aids in financial planning but also positions businesses to thrive in the diverse and ever-evolving Canadian business environment.