A budget describes an amount of money that an organization plans to raise and spend for a set purpose over a given period of time which comprise of four basic components:
Planning: Budgets are used to build an accurate picture of what a new project will cost to run, and they help to raise funds.
Organizing: We use the budgets and associated codes when we spend and raise money, organizing them as we record them in our books of account.
Monitoring: Budgets help assess performance compared to the project financial plan, evaluating if the project achieved what it set out to achieve.
Controlling: Budgets help teams control the use of financial and other resources, ensuring that they are used efficiently and effectively
Imagine you are creating a project budget. Where will you start? What is the first question you need to answer?
Zero-based budgeting – This type of budgeting is best for new and one-off projects, or projects where things change a lot each year. It starts with a clean sheet (or zero base) and builds the budget according to planned activities and targets using up to date costs. The resources are listed, quantified, and individually costed.
Incremental budgeting – This type of budgeting is best for projects with activity and resource levels that change little from year to year. The new budget is based on the previous year’s actual, or sometimes budgeted, figures with an allowance for inflation and known changes in activity levels.
Which approach is better?
There is no right or wrong approach, it all depends on your situation. Sometimes incremental budgeting is appropriate, and even preferable. This may be the case if you have existing projects that are truly comparable to your future activities and you don’t expect things to change a lot, or if you are extending an existing set of activities into a new time period. Nevertheless, you need to carefully confirm the quality of the budget you are using as a starting point, because you don’t want to carry over historical errors or omissions into your new budget. This approach may also reduce innovation, as project teams use the same plan and resources year after year.