A budget is like a roadmap for a business. It tells you where money should go, how much you expect to earn, and helps you make smart decisions. Think of it as a planner for a school trip: you decide how many snacks, how much transport, and how much fun activities you can afford.
An incremental budget builds on the previous year’s figures. You take last year’s budget and add or subtract a percentage to reflect expected changes.
Mathematically:
\$ \text{New Budget} = \text{Previous Budget} \times (1 + \text{Change\%}) \$
| Item | Previous (£) | Change % | New (£) |
|---|---|---|---|
| Marketing | 10,000 | +5% | 10,500 |
| R&D | 8,000 | -2% | 7,840 |
Flexible budgets change with activity levels. Instead of a single fixed figure, they adjust based on actual sales or production volume.
Analogy: Imagine a pizza shop that plans ingredients based on the number of pizzas sold. If sales double, the budget for ingredients doubles too.
Formula:
\$ \text{Flexible Budget} = \text{Base Budget} \times \frac{\text{Actual Activity}}{\text{Planned Activity}} \$
Zero budgeting starts from scratch each period. Every expense must be justified, as if the business had no previous budget.
Analogy: Think of packing for a trip. Instead of taking everything you had last time, you decide each item’s necessity for this specific journey.
💡 Tip: Combine approaches! Use a flexible budget for sales and an incremental budget for fixed costs.