Throughout the years, many businesses have struggled with the limitations of traditional budgeting. On top of it taking too much time because of having to use spreadsheets, many people think this time is better used on more important business initiatives.
Because of the inherent use of spreadsheets in traditional budgeting, this makes it more prone to errors, a lack of data control, and inaccurate formulations. It is also known to be difficult to scale, which means annual budgets get obsolete rather quickly after it has been created. In a world where change and disruption are a fact of life, companies that still stick with traditional budgeting find it difficult to adapt and respond quickly to the demands of today’s volatile business environment.
In this article, we’ll explore other alternatives to traditional budgeting that businesses can take.
Budgeting is crucial for businesses but to make it more effective in today’s current business landscape, there has to be a better way to do it more efficiently.
Activity-based budgeting records, researches, and analyzes costs for an organization. In this budgeting option, every cost-incurring activity is further analyzed to identify ways to make it more efficient. This is where the organization’s budget is based on as well.
Activity-based budgeting is more extensive and can take longer than traditional budgeting. is more rigorous than traditional budgeting processes, which tend to merely adjust previous budgets to account for inflation or business development. However, activity-based budgeting is designed to help businesses reduce costs, identifying key areas that can help the organization get more profit than sales. This type of budgeting can be effective for startups and newer businesses where material changes are more visible and accountable.
Another suitable alternative to traditional budgeting is the use of rolling forecasts. Rolling forecasts predict the future performance of a business over an extended and continuous period, based on historical data.
In comparison to static budgets where forecasts are fixed in time, a rolling forecast is updated throughout the year to reflect changes. For every period that passes, a new period is added automatically, allowing companies to predict future performance based on the latest data. For agile organizations and businesses that are always adapting and evolving, rolling forecasts are the right fit and allow them to be more fluid with their budgets — making them more responsive to any change that may come their way.
Zero Based Budgeting
Zero-based budgeting is another method of budgeting wherein every expense needs to be accounted for per period. It starts with a zero base. Every function in the organization is then reviewed in terms of needs and costs. Budgets are developed according to what is needed for the upcoming period. Every item of cost needs to be justified. The premise behind zero-based budgeting it to identify specific costs that can be stripped down to allocate the budget accordingly for the next acquisition. Although this was popular in the 70s, it has recently been used again to help companies identify and weed out specific costs for quick financial returns as compared to long term investments.