In the world of UK commerce, where fiscal policy and economic conditions change frequently, choosing the right financial planning approach is important. Well, incremental budgeting is one approach used to create a new budget.
It is a common method where a new budget is developed by making small adjustments to the existing one. Let’s discuss how incremental budgeting can simplify your business financial planning process. This blog also breaks down the core mechanics of incremental budgeting and its advantages and disadvantages.
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What is Incremental Budgeting?
Incremental budgeting is a traditional way of financial planning that includes using the current period’s budget or actual performance as a baseline.
In simpler words, the current budget is used as a base, and incremental changes are added or subtracted. This is done to determine new budget amounts. It is one of the most conservative approaches used by businesses.
The manager applies small adjustments or increments to existing figures to create a new budget. These changes are typically driven by:
- Policy changes
- Inflation
- Salary increments
Incremental Budgeting Example
A marketing company’s budget for staff was £100,000. For the next year, the manager
plans to provide a 5% pay increase to all staff due to inflation. The budget for this year would increase to £105,000.
Advantages of Incremental Budgeting
There are numerous reasons why incremental budgeting can be appealing to companies. Some of its benefits include:
Simplicity
It is one of the easiest and fastest budgeting approaches to implement compared to bottom-up methods such as Zero-Based Budgeting (ZBB). It does not require complex calculations because it uses the budget for the current period to project the future budget.
Saves Time
The method’s simplicity allows you to save time on the budgeting process. If you have a busy finance team, this approach can be a lifesaver.
Predictability
You can make more reliable financial plans for the future by using past financial data because incremental budgeting shows trends and patterns you can expect. It also ensures that funding remains stable over time.
Operational Stability
The reliance on figures from previous budgets of previous periods ensures budgets remain consistent and stable over time.
Conflict Reduction
Since departments are treated consistently, incremental budgeting often avoids the internal rivalry for resources common in other methods.
Disadvantages of Incremental Budgeting
If you are managing a department’s budget, you need to understand the benefits as well as the drawbacks of incremental budgeting, such as:
Promotes Unnecessary Spending
Incremental budgeting may lead to unnecessary spending within companies as departments tend to exhaust their allocated budgets to secure higher funding in the following period.
This approach can lead to increases in departmental budgets over time, regardless of actual needs, thereby fostering inefficiency and potential waste.
Discourages Innovation
This type of budgeting approach may discourage innovative ideas. There is little room for new initiatives or investment because new budgets are based on figures from previous budgets.
Fails to Account for Changes
It ignores the real-world challenges. Since it assumes conditions remain largely unchanged, it cannot handle market shifts and unexpected shocks like new competition or sudden inflation.
No Motivation for a Comprehensive Review
The stability of incremental budgets discourages management from reviewing budgets to achieve expenditure savings, leading to potential waste, flawed assumptions, and errors.
Why Understanding Incremental Budgeting is Important?
UK businesses that are experiencing significant fiscal shifts or inflation need to understand incremental budgeting for financial stability and controlled adjustments.
- It simplifies your work because it doesn’t involve starting from scratch every year.
- It is efficient for small businesses based in the UK. It is quick and easy to prepare, freeing up time for strategic forecasting in a volatile economy.
- It helps to maintain consistent funding levels for departments. This ensures that core UK business operations remain steady during times of economic uncertainty.
- OBR forecasts suggest inflation may return closer to 2% in the coming years, but it is expected to remain “sticky” during 2025/26. The incremental approach offers a historical baseline to account for these price changes.
- This method helps businesses to calculate and add new, higher National Insurance costs ( rising from 13.8% to 15% for employers from April 2025) to their existing staff budget.
Final Thoughts
Incremental budgeting is a powerful approach for stability and efficiency. However, you shouldn’t use it without looking at the bigger picture. Successful organisations across the UK often use a hybrid approach, using incremental budgeting for predictable costs, while applying ZBB every 3 to 5 years to clean out the baseline. This ensures every pound is still delivering the value.
If you are a small business, you can use incremental budgeting to maintain a stable income and expenses. However, if you are experiencing rapid change or growth, you can maintain stability by combining the speed of the incremental approach with other budgeting methods.
Ultimately, choosing the right budgeting approach can help your business to stay competitive and financially organised.
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How Can CheapAccountantsInLondon Help?
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Disclaimer: This article intends to provide general information on incremental budgeting in the UK.