Budgeting is one of the most critical tasks in finance. Yet, many organizations struggle with how to allocate funds fairly and plan for the future. Complex models can feel overwhelming, leaving finance teams frustrated and managers uncertain.
One of the most straightforward methods is incremental budgeting. It is widely used across businesses, governments, and nonprofits because it builds on last year’s budget with small, logical adjustments. In this guide, you’ll learn the meaning of incremental budgeting, how the process works, its advantages and disadvantages, and practical examples for 2025.
What Is Incremental Budgeting?
Incremental budgeting is a method where the current year’s budget is prepared by making adjustments to the previous year’s budget. Instead of starting from scratch, finance managers add or subtract a percentage to account for inflation, growth, or cost-saving measures.
Key Features:
- Uses last year’s figures as the baseline
- Adjusts for known changes (inflation, expansion, cost cuts)
- Focuses on stability and continuity
Example: If a company’s marketing budget was $100,000 in 2024, an incremental budget may increase it by 5% to $105,000 in 2025.
This method is often chosen because of its simplicity and predictability.
The Process of Incremental Budgeting
The step-by-step process is straightforward:
- Review Last Year’s Budget
Finance teams use the previous year’s financial data as a starting point. - Identify Adjustments
Add or reduce based on factors like inflation, staffing, or new projects. - Apply Percentage Increases or Cuts
Typically, organizations apply a fixed percentage across multiple departments. - Review by Management
Department heads and finance leaders review changes for accuracy. - Approval and Implementation
The finalized budget is approved and monitored throughout the year.
Tip: Companies often adjust expenses for inflation (e.g., 3–5%) or revenue growth targets when applying incremental budgeting.
Advantages of Incremental Budgeting
- Simple to Use: Easy to calculate and understand for all stakeholders.
- Stable: Keeps budgets consistent year to year, reducing major disruptions.
- Time-Saving: Requires less effort compared to zero-based budgeting.
- Predictable: Useful for organizations with steady operations.
- Widely Adopted: Used by governments, schools, and large corporations.
Limitations of Incremental Budgeting
While practical, incremental budgeting also has drawbacks:
- Encourages Waste: Departments may overspend to secure higher future budgets.
- Ignores Efficiency: Doesn’t force managers to rethink expenses.
- Assumes Past Budgets Were Correct: Errors from last year roll forward.
- Less Flexible: Not ideal for industries facing rapid change.
Incremental Budgeting Examples
Example 1: Corporate Budgeting
A manufacturing company spent $1 million on operations in 2024. With inflation at 4%, the operations budget for 2025 is increased to $1.04 million.
Example 2: Government Budgeting
A city’s education department spent $50 million in 2024. The incremental budgeting process adds 3% for rising teacher salaries, resulting in a $51.5 million budget for 2025.
Example 3: Small Business Budgeting
A café spent $20,000 on supplies in 2024. Expecting higher ingredient costs, the owner adds 5%, raising the 2025 supply budget to $21,000.
Incremental Budgeting vs Zero-Based Budgeting
| Factor | Incremental Budgeting | Zero-Based Budgeting |
|---|---|---|
| Starting Point | Previous year’s budget | No baseline, built from scratch |
| Complexity | Low | High |
| Time Required | Quick | Lengthy |
| Best For | Stable organizations | Changing or growing companies |
| Risk of Waste | Higher | Lower |
When to Use Incremental Budgeting
- Stable Environments: Works well when costs and revenues are predictable.
- Public Sector: Governments and nonprofits often rely on this method.
- Large Organizations: Easier for corporations with many departments.
- Short-Term Planning: Useful when budgets are needed quickly.
FAQs About Incremental Budgeting
1. What is incremental budgeting in simple terms?
It’s budgeting by adjusting last year’s numbers with small increases or decreases.
2. Why do companies use incremental budgeting?
It’s simple, saves time, and provides stable year-to-year planning.
3. What are the disadvantages of incremental budgeting?
It can encourage waste, ignore efficiency, and repeat past mistakes.
4. Is incremental budgeting still relevant in 2025?
Yes, especially for governments and stable industries.
5. How is incremental budgeting different from zero-based budgeting?
Zero-based starts from scratch; incremental uses last year’s figures.
6. Who benefits most from incremental budgeting?
Large organizations, governments, and nonprofits with stable operations.
7. What industries avoid incremental budgeting?
Fast-changing industries like tech often need flexible alternatives.
8. How does inflation impact incremental budgeting?
Budgets are often increased by a percentage equal to inflation.
9. Can small businesses use incremental budgeting?
Yes, it’s simple and useful for cafés, shops, and service providers.
10. What tools help with incremental budgeting?
Excel, QuickBooks, and ERP systems streamline the process.
Conclusion
Incremental budgeting remains one of the most practical methods for managing finances in 2025. By building on last year’s budget with small changes, it helps organizations save time and maintain stability. While it has limitations, it continues to be popular in governments, schools, and businesses where predictability is more important than innovation.
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