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When creating a budget for a small business or a corporation, it is important to determine which method is best suited to it. The different types have unique strengths and advantages that can be used to maximize the financial perspective of an organization. Some organizations use a type of budget at all levels of the company, while others use various types of budget depending on what works best for each department.
Budget based on performance
A performance-based budget uses the performance of a particular branch or unit to write a new budget planned for the next period. For example, a fundraising branch of a company would be assigned to raise a certain amount of money. The future budget of that department is calculated based on how well the department met its objectives. Each unit is assigned an objective or a goal, which is why this type of budget is adapted to large organizations with multiple branches, departments or units. Performance-based budgets are tailored to companies and departments that have monthly measurable objectives, quarterly or annual production.
The zero-based budget is a granular method to analyze expenses at all levels of an organization and make decisions and execute new plans for each unit. This goes all the way to the lowest level of address, known as Zero-Base Budget. The objective of zero-based budgeting is the control of useless or unnecessary expenses. When discrepancies arise, this method requires that everyone in a department in question justify the expenses. The zero-based budget works well for personal budgets and for smaller, localized businesses. Due to the complexities of each budget level, zero-based methods can be too complicated for large companies.
Incremental budgeting is a more flexible plan than the zero-based budget method or based on performance. A business that uses an incremental budget allocates financial resources according to the most recent budget year, which could be one month, one quarter or another total period. You can adjust the budget up after a good quarter, or down after a bad one. Incremental budgeting is the most appropriate for a fast growing business with a constantly changing income level. It is easy to follow and is compatible with gradual changes, of reflection, but tends to ignore economic trends and lacks deep revision or analysis.