Establishing a budget can be quite daunting, as is selecting the optimal budgeting method that aligns with your business’ unique model and requirements. In this blog article, we will delve into the five most prevalent budgeting approaches, their advantages and disadvantages, and when to use each.
Read more:Budgeting Takes Too Long? Vital Signs You Need A Dedicated Solution
The 5 most common budgeting approaches that organisations often use
1. Incremental Budgeting
Definition:Incremental budgeting computes a budget by applying adjustments to the preceding period’s actuals. The change typically comes in the form of percentage-based adjustments and could either be an increase or a cutback, depending on various factors, primarily the organisation’s needs and situation.
This typically involves modest adjustments (often in the low single-digit to around 10% range) rather than major overhauls. To some extent, it reflects business growth and market changes.
This conservative approach uses historical data and is generally preferred by businesses whose cost drivers remain static. This suggests that such businesses tend to maintain slow growth and steady profitability and experience little to no market fluctuation or competition, at least for a long time.
Example: Imagine a department with a budget of $100,000 last year. If management decides to increase the budget by 5% to account for inflation and other factors, the new budget would be $105,000.
Read more:Step-by-step guide to developing and managing a budget
| Pros | Cons |
| Incremental budgeting fails to help companies stay competitive in a fast-changing economy. As a result, some organisations have abandoned this method, especially after the 2008 global financial crisis, due to its limitations:
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2. Zero-based Budgeting (ZBB)
Definition: In contrast with incremental budgeting, the ZBB approach justifies all manner of budget expenditures and line items on the balance statement, disregarding previous periods’ spending.
In other words, ZBB compels businesses to build a completely new budget from scratch, starting from the baseline of “zero,” as the name suggests. People in charge, i.e., analysts, will evaluate and justify every expense.
Example: A retail company preparing next year’s budget applies zero-based budgeting by requiring its marketing department to start from scratch and justify every expense rather than using last year’s $1 million budget as a baseline.
After reviewing each activity, management approves high-performing digital ads, reduces spending on low-return trade shows, eliminates rarely used print materials, and introduces a new SEO initiative aligned with growth goals. As a result, the final marketing budget is set at $820,000, demonstrating ZBB’s ability to reallocate resources toward activities that deliver measurable value.
Read more:Financial Planning vs Budgeting vs Forecasting: A Quick Comparison
At the outset, ZBB is structured to optimise cost containment and management, an imperative in this ever-changing world. Aside from that, it is also a value generator that supports a wide range of functions. For instance, consumer goods companies such as Unilever, Kraft Heinz Co, and Mondelez International have publicly reported using ZBB programmes to strip out unnecessary overhead and redirect spending toward high-growth brands and digital capabilities. [2]
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3. Rolling (Continuous) Budgeting
Definition: Rolling budgeting is a rigorous method where people continuously add a new budget period to replace the previous one as it expires.
In practice, rather than setting a fixed annual budget, organisations update key financial and operational projections on a recurring basis, typically monthly or quarterly, while maintaining a constant forward-looking planning window (such as the next 12, 18, or even 24 months into the future). We discussed this approach and its implications in-depth in our blog post.
Example: A company developed an annual budget for 2026. In March 2026, the company adds the budget for February 2027 to replace the expired February 2026 budget. At that point, the rolling budget covers all revenue, expenses, and profits from March 1, 2026, through February 28, 2027.
When March 2026 ends, the rolling budget shifts forward again to cover April 1, 2026, through March 31, 2027. The cycle continues every time a month closes; a new month is added at the end, maintaining a full 12-month view.
| Pros | Cons |
| Time-consuming: Budgeting now is a monthly or quarterly activity rather than once a year. |
4. Activity-based Budgeting (ABB)
Definition: Activity-based budgeting (ABB) calculates the total cost required to achieve the expected target for specific activities (hence its name).
This top-down method first calls for identifying and thoroughly scrutinising all activities that drive costs. This analysis will then serve as a basis for allocating resources to achieve the predefined targets.
Example: You run a small toy manufacturing company. Your sales forecast for next year is 10,000 units, and each is assigned a cost of goods manufactured (COGM) of $5. Employing ABB, you should compute a budget of $50,000 (10,000 * $5).
Read more:How Raymond James Financial slashed 50% of its reporting time
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5. Performance-based Budgeting (PBB)
Definition: In performance-based budgeting (PBB), businesses first set goals or desired outcomes. These objectives will serve as the rationale for the next course of action and its associated costs.
By revolving around objectives, or the “outcomes” that the organisation wants to achieve, PBB helps build a result-oriented culture.
On a side note, some performance indicators, i.e., KPIs (Key Performance Indicators), are now widely employed to facilitate this practice.
Read more:How to Build a Budget Management Culture: A Step-by-Step Guide for Managers
Example: A hotel sets a strategic goal to increase guest satisfaction scores to 4.5/5 and boost average occupancy to 80%. Under performance-based budgeting, the rooms and guest services departments must justify their budgets based on KPIs such as guest satisfaction ratings, online review scores, room turnaround time, and occupancy growth.
Funding is increased for staff training and digital check-in technology because they directly improve these metrics, while low-impact promotional spending is reduced. This ensures the hotel’s budget is tightly linked to measurable service quality and revenue outcomes.
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Should businesses budget using spreadsheets or budgeting software?
Organisations often rely on either spreadsheets or dedicated budgeting software to plan and manage their finances. While both tools support financial planning, they differ significantly in how they handle data, collaboration, and scalability.
| Using spreadsheets for budgeting | Using software for budgeting |
| Spreadsheets such as Microsoft Excel or Google Sheets are widely used because they are familiar, flexible, and easy to access. They allow users to:
Many individuals and small teams use spreadsheets to categorise income and expenses, track budgets monthly or weekly, and create charts that visualise financial performance. | Budgeting software is a specialised financial tool designed to help organisations plan, manage, and analyse their budgets more efficiently. Unlike spreadsheets, these platforms:
Modern budgeting solutions also support advanced financial activities such as forecasting, scenario planning, and performance tracking. By connecting financial data across departments, budgeting software enables organisations to make more informed decisions and maintain better control over their financial operations. |
The increasing adoption of budgeting software reflects a growing demand for more dependable and scalable financial planning solutions. Market research indicates that the global enterprise budgeting software market is expected to expand from approximately $1.66 billion in 2025 to $2.16 billion by 2029, representing a compound annual growth rate (CAGR) of around 6.7% [4].
This steady growth shows that more organisations are investing in dedicated technologies to strengthen financial visibility and support better decision-making.
Read more:The Use of Spreadsheets and Modern Cloud Adoption in Businesses
Research also reveals a clear difference in how companies manage their budgeting processes. More than 80% of high-performing organisations rely on specialised planning and budgeting tools, whereas around 40% of lower-performing companies still depend primarily on Excel [5].
This contrast highlights the increasing importance of automated budgeting platforms in improving financial accuracy, operational efficiency, and long-term strategic planning.
Cloud budgeting solution for business
Cloud-based budget modelling represents a major shift in how organisations conduct financial planning and analysis. Traditionally, budgeting relied heavily on on-premise software and manually maintained spreadsheets. These approaches often created inefficiencies, limited collaboration, and made it difficult for teams to access real-time financial data. With the rise of cloud computing, however, budgeting systems have become more dynamic, collaborative, and accessible from virtually anywhere.
This transformation enables organisations to build budgeting models that automatically update as new data becomes available. Financial forecasts become more accurate, and stakeholders across departments can contribute insights in real time. As a result, budgeting evolves from a static annual process into a continuous and responsive financial planning activity that can quickly adapt to market changes and operational needs.
From the perspective of a Chief Financial Officer (CFO), cloud-based budgeting provides a more strategic approach to financial management. With access to real-time data and advanced analytics, finance leaders can make faster and more informed decisions.
For IT teams, cloud infrastructure reduces the burden of maintaining complex on-premises financial systems while providing scalable, secure platforms. Meanwhile, department managers can input their own assumptions and operational data, ensuring budgets more accurately reflect business realities.
Read more:How Autogrill VFS F&B Streamlines Operations with SunSystems Cloud
The rapid adoption of these solutions is also reflected in market growth. The global cloud financial planning and analysis (FP&A) software market was valued at approximately $14.2 billion in 2024 and is projected to reach over $30.5 billion by 2032, growing at nearly 9.85% annually as organisations seek more agile financial planning tools [6].
Similarly, the broader budgeting and planning software market is expected to expand from around $13.7 billion in 2024 to $26.5 billion by 2032, driven largely by demand for automation, real-time analytics, and cloud-based financial management systems [7].
As businesses face increasingly complex and dynamic environments, cloud-based budgeting tools are becoming essential for maintaining financial visibility and making informed decisions.
How TRG International can help your business
Selecting the right budgeting approach and technology can be challenging, particularly for organisations that are transitioning from manual spreadsheets to more advanced financial planning systems. This is where TRG International supports businesses in building more efficient and scalable budgeting processes.
TRG International provides consulting services and enterprise solutions designed to help organisations streamline financial planning, budgeting, and performance management.
With 30+ years of consulting and implementing financial management solutions across industries, TRG enables businesses to improve financial visibility and make more data-driven decisions through innovative, truly impactful solutions.
TRG also assists you in integrating budgeting solutions with existing enterprise systems such as ERP and accounting platforms. This ensures that financial information flows seamlessly across the business, improving accuracy while reducing the manual workload often associated with traditional budgeting methods.
Ready to transform your budgeting and financial planning process? Get in touch with TRG International today to discover how our solutions can help your organisationimprove financial visibility, streamline budgeting workflows, and support smarter decision-making.
Sources:
1. https://coefficient.io/cfo-resources/how-to-do-incremental-budgeting
2. https://www.treasurers.org/hub/treasurer-magazine/zero-based-budgeting-rise-among-act-members-says-ceo
3. https://www.mckinsey.com/capabilities/operations/our-insights/zero-based-budgeting-revisited-why-this-time-is-different
4. https://www.researchandmarkets.com/reports/5948757/budgeting-software-market-report
5. https://barc.com/budgeting-software-versus-excel/
6. https://www.futuremarketreport.com/industry-report/cloud-financial-planning-and-analysis-solutions-market/?utm_source=
7. https://www.futuremarketreport.com/industry-report/budgeting-and-planning-software-market/
