Whether it is on a personal or business level, budgeting is an integral part when it comes to managing finances. It is a procedure which helps you keep track of your income and expenses, enabling individuals to make informed financial decisions, prioritizing capital expenditure, and saving a chunk of your income. All in all, budgeting is a synchronized way to get a bigger picture of the capital in hand.
There are various types of budgeting methods. This blog aims to identify and explain some of the most common ones. Here is a list of 5 budgeting methods.
Activity Based Budgeting
Activity based budgeting primarily focuses on all costs that are incurred in all business activities’. It is an extremely precise, but time taking form of keeping track of all costs and expenses allocated.
Lets say, you own a taco joint and each taco costs you around $5. You multiply the cost of each taco with a lump sum total amount of tacos you sell every year. Let’s say it’s 10,000 each year. This makes 5×10,000= $50,000 your annual budget. That is your base budget for one year.
Zero Based Budgeting
This is a budgeting method which requires justification of all costs at the end of each year or each quarterly; which means the budget model starts from zero and nothing is carried over from previous periods. This helps understand the ever changing needs of business with rational reasoning behind costs, expenses, profit and savings over time.
This is helpful for starting a business from scratch or project based businesses’.
Cash Flow Budgeting
Cash flow budgeting method focuses on the in and out cash flow in a business rather than limiting the budget according to expenses.
For example, a marketing agency can allocate higher budgets to their high profile clients.
Flexible Budgeting
A budget provides a holistic view of a business model. Budgeting, however, is not fixed, and is subject to change accordingly. Flexible budgeting allows businesses to adapt and respond positively to changes whether it is a spike in sales or reconstructing the business model according to market needs.
If a flower shop works at full potential in the wedding season, the owner must adhere to a flexible budgeting model to cater more customers.
Incremental Budgeting
Unlike zero based budget, incremental budgeting favors taking the numbers from previous annual or quarterly periods. You have a base budget to make the required changes, whether increase or decrease in required costs or expenses.
Conclusion
Budgeting is an important part of creating, sustaining and upscaling any business. It allows you to keep track of finances and make rational, real time business related decisions.
If you are looking to create, revise or modify a budget model, Huned CPA is your one-stop solution. Direct your queries to (855) 674-3272 and get useful insights on how to develop a sustainable and well thought business.