Incremental Budgeting: What Is It, Why Is It Important and How Do You Create An Incremental Budget?

What Is Incremental Budgeting?

Incremental budgeting is commonly used because it’s one of the most conservative approaches in corporate budgeting. You make small adjustments by adding to or subtracting from your budget items. (There are a few other budgeting approaches you can take, such as zero-based budgeting, top-down budgeting and bottom-up budgeting.)

What is the Importance of Incremental Budgeting?

Incremental budgeting is simple, consistent and stable. Your budget owners make minor adjustments to their budget items based on their assumptions, which come from objective information.

While each budget item may be subject to less scrutiny—compared to zero-based budgeting— it doesn’t necessarily mean budget owners have spent less time on analysis for their adjustments. And while it’s possible that it happens, they should still make the same effort in their analysis before providing their new numbers.

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How to Create an Incremental Budget

To create your incremental budget, start with your previous period’s budget. Those numbers are your new budget’s base numbers—it’s that easy. Now your budget owners need to make those small additions to or subtractions from (or even no adjustments in some instances) to those base numbers. Your budget owners should consider factors, such as inflation and other economic conditions, in their analysis when budgeting their expenditures.

Advantages of Incremental Budgeting

• Simplicity: No complex calculations are required.
• Consistency: Budget owners can expect only low deviations in their funding.
• Equality: There is less competition for funding among budget owners.
• Stability: Incremental budgeting works well at large organizations—when in stable economic conditions—because they experience lower fluctuations.

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Disadvantages of Incremental Budgeting

• Misleading: Incremental budgeting doesn’t work well at small organizations because they experience higher fluctuations and incremental budgets don’t consider economic conditions.
• Wasteful Spending: Budget owners can spend up to—or all of—their budget on unnecessary expenses to avoid losing funding in the next period’s budget.
• Not Seizing Opportunities: There is less flexibility and innovation, so budget owners may not receive enough funding to maximize revenue generation.
• Cost Management: With less flexibility and innovation, it’s more difficult to reduce costs, especially when economic conditions are volatile.

Additional Budgeting Resources

Incremental budgeting is only one of many budgeting approaches. Whichever you choose, you need to be able to trust in the accuracy of your previous numbers.

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