Different techniques for setting a budget
When it comes to management accounts, there are different techniques you can use for setting your budgets, below we take a look at four of these options.
ABB - Activity-based budgeting
With this type of budgeting, you'll have to start with the end goal in mind. So once you have your aims or goals for the period, you'll then look at the resources needed to achieve them and use this to set your budget.
The positives of using this method is that it'll be tailored to the organisation and can incorporates external factors and the business is focused their targets.
The negatives of using this method is that it may not be realistic as it's based off general assumptions made on the resources and doesn't take into consideration rising costs.
VPB - Value-propositioning budgeting
VPB looks at all items in the budget and how they are delivered and questions each of them. With this method, each budget must be delivering value.
The positives of using this method is that the cost centres are driven by delivering value. It helps the business target inefficiencies and reduces unnecessary costs.
The negatives of using this method are that it can create a negative environment in the workforce as staff won't like the budgets being questioned. Also it can be very time consuming.
With incremental budgeting you take last year's budget, uplift it proportionally to give the budget for this year. This is fine for businesses where cost drivers don't change much but this method can have inefficiencies.
The positives of using this method is that it's easy and quick and can be worked with a fair degree of precision.
The negatives of using this method are that there are no incentives for staff to make efficiences as they know that next year they will be provided with the same budget with an increment.
With Zero-based budgeting nothing is assumed. The budget starts at Zero and costs are built up from scratch. All costs have to be justified and approved. This type of budget is closely monitored to avoid unnecessary expenditure, so the person doing the budgeting needs to have knowledge of the market and resources available.
The positives of using this method is that it keeps staff on their toes, minimises inefficiences and is a great method of containing costs.
The negatives of using this method are that it takes alot of effort and time. Also it over focuses on discretionary budgets as the operational costs are seen to be fairly set.