The traditional budget process takes the existing budget and increases or decreases it by a certain percentage. This is done as a whole for a really quick and easy method or line-by-line in a more detailed approach. Either approach gets the job done quickly but are the results worth it?
There are several more modern ways to create a budget for a business: Zero-based, Activity based and Kaizen are among the most popular. Zero-based budgeting reverses the process of traditional budgeting by starting each line item at zero. No reference is made to the current budget or prior spending levels, instead each expense budget must be justified.
Activity based budgeting groups the business expenditures by activities in the various functional areas such as administrative, sales and manufacturing. Activities are tied to the strategic goals the company has set and the costs needed to fund the activities are the basis of the budget. This technique allows a business to align its costs with its goals and objectives, reduce costs and improve business practices.
Kaizen is the Japanese word for continuous improvement and goes along with the lean process. The budget is set based on future improvements in all areas which means the budget cannot be achieved unless the improvements are made. This process forces a business to actually implement the changes it has developed during a strategic planning session or goal setting exercise. The approach has a company work to minimize costs at all stages of the product life cycle and in all areas of the business.
All three of these techniques are much more time consuming than the traditional process but all three give more realistic and thoughtful numbers to work with. The whole reason to budget is to help guide and manage a business better so even if the process is tedious, utilizing any of these techniques will help you grow your company and achieve greater results.