Learn the key budgeting methods, their pros and cons, and when to use each.
Budgeting is the backbone of effective financial planning for any organization. Whether you’re managing a small team or leading a multinational company, understanding different budgeting techniques helps ensure smarter resource allocation, greater accountability, and alignment with strategic goals.
In this article, we’ll explore the four main types of budgeting: incremental budgeting, activity-based budgeting, value proposition budgeting, and zero-based budgeting. Each approach offers unique benefits and is suited for different operational contexts.
Common 4 Types of Budgeting
Here are the 4 common types of budgeting
1. Incremental Budgeting
Incremental budgeting is the most traditional and widely used method. It involves taking the previous year’s budget and adjusting it up or down by a fixed percentage. This approach is particularly helpful for organizations with predictable financial environments and consistent cost drivers.
Pros of Incremental Budgeting:
- Simplicity: Easy to create, understand, and implement.
- Stability: Offers a predictable framework, ensuring continuity in operations.
Cons of Incremental Budgeting:
- Perpetuates inefficiencies: Encourages departments to spend their full budget to ensure increases in future years.
- Ignores external changes: Doesn’t account for inflation, market shifts, or other external factors.
Best Used When:
An organization values stability and minimal change in operations, or when financial drivers remain consistent year over year.
2. Activity-Based Budgeting (ABB)
Activity-Based Budgeting starts with setting business goals (such as revenue targets) and identifies the activities required to achieve them. Budgets are then built based on the costs of these activities, rather than historical spending.
Pros of ABB:
- Greater cost transparency: Connects spending directly to strategic activities.
- Drives efficiency: Helps identify cost drivers and unnecessary activities.
Cons of ABB:
- Resource-intensive: Requires detailed analysis and time to assess activities and associated costs.
Best Used When:
Organizations need a granular understanding of resource allocation and aim to optimize performance through operational analysis.
3. Zero-Based Budgeting (ZBB)
Unlike incremental approaches, Zero-Based Budgeting assumes that no previous expenses are automatically justified. Every line item must be reviewed and approved from scratch during each budgeting cycle.
Pros of ZBB:
- Eliminates waste: Forces departments to justify all expenses.
- Highly adaptive: Aligns spending with current goals and priorities.
Cons of ZBB:
- Time-consuming: Requires thorough justification and planning.
- Resource-heavy: Needs intensive data collection and analysis.
Best Used When:
There’s a need to reduce costs dramatically, such as during financial restructuring or when shifting strategic direction.
4. Value Proposition Budgeting
Value Proposition Budgeting emphasizes allocating funds only to activities that deliver real value to customers, employees, or stakeholders. It evaluates each expense based on whether it adds measurable benefit to the organization.
Pros of Value Proposition Budgeting:
- Customer-focused: Supports initiatives that enhance customer experience.
- Strategically aligned: Ensures spending aligns with long-term business goals.
Cons of Value Proposition Budgeting:
- Requires strong customer insight: May not be effective without accurate data on what customers value.
- May deprioritize short-term cost control: Focuses more on value than cost-cutting.
Best Used When:
Organizations are customer-centric and aim to build long-term loyalty through strategic spending.
Blended Budgeting: The Hybrid Approach
Many organizations use a hybrid budgeting strategy to leverage the strengths of multiple methods. For example:
- Use incremental budgeting for core operational expenses.
- Apply activity-based budgeting for project-specific planning.
- Implement value proposition budgeting for strategic growth initiatives.
- Deploy zero-based budgeting during cost-cutting or transformation periods.
This hybrid approach allows for flexibility, efficiency, and alignment with strategic priorities.
Levels of Involvement in Budgeting
How budgets are created also depends on who’s involved in the process. Here are three main approaches:
Imposed Budgeting (Top-Down)
Executives set the budget with minimal employee input. Effective in crisis scenarios but may reduce team morale.
Negotiated Budgeting
A collaborative process where top-level goals are discussed and adjusted with input from managers and staff. Balances alignment and employee buy-in.
Participative Budgeting (Bottom-Up)
Budgets are proposed by department heads and reviewed by executives. Enhances engagement but may reduce control.
Final Thoughts
Each of the four budgeting methods—Incremental, Activity-Based, Zero-Based, and Value Proposition—offers a different lens through which to view your organization’s finances. The key is choosing the right method—or combination—that aligns with your business objectives, culture, and operational capacity.
Facilities Management and Budgeting: Why It Matters
For facilities managers, budgeting is more than just crunching numbers—it’s about optimizing building operations, maintenance, and resource allocation. Choosing the right budgeting method ensures that capital improvement projects, energy initiatives, and maintenance schedules are cost-effective and aligned with organizational goals.
The use of modern facilities management software like Facility Bot and budget management software simplifies these processes by enabling real-time data tracking, predictive maintenance planning, and seamless financial oversight. By adopting the right budgeting method and digital tools, facilities teams can enhance cost control, extend asset life cycles, and improve service delivery.
