Question
Approaches to Budgeting.
Answer :
Word Count : 846
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Skip in 10
“A budget is a comprehensive, formal plan, expressed in quantitative terms, describing the expected operations of an organization over some future time period”
In any of the described approaches to budgeting, the key point is that the budget is a management tool to assess whether the business is on track, or adjustments are required. Budgets should take account of market conditions such as margin pressure, macroeconomic factors such as changing tax legislation, as well as internal factors such as resource allocation.
Incremental Budgeting
In Incremental Budgeting last year’s budget is used as a starting point for the new budget, and a number of increases are ‘pre-programmed’. These include inflationary increases, salary increases, and overall market growth increases.
Usefulness
Incremental budgeting is relatively easy to implement, but it has a number of serious limitations, including:
- An inherent assumption that the current methodology and cost structure is the best way, and should be built upon
- It encourages people to have expectations of inflationary increases in salary and business, for doing the same role in a changing market
- It assumes that existing customers will grow in line with market growth, without accurately reflecting the incremental costs of
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