Saturday, November 7, 2009

Budget Question

Most companies are well into budget planning for 2010, using what's known as "incremental" budgeting. I prefer "zero based" budgeting, a process I shared with students at Mount Royal University earlier this week.

Essentially, zero based budgeting is the opposite of incremental (aka “use it or lose it”) budgeting. With incremental budgeting, if your department had a $50,000 budget in 2009, they will automatically get a $50,000 budget in 2010 with a small percentage increase based on negotiations with management.

With zero based budgeting, you negotiate for your entire budget each year based on your strategic plans for the upcoming year. Under current economic conditions, incremental budgets are being maintained (after cutting earlier in this year) or being reduced for 2010.

By taking a “zero based” approach to your projects, you should go into a presentation with management with all relevant quotes and estimates from your suppliers in hand so when management says, “so as part of our awareness campaign you want to do a direct mail campaign to every household in Okotoks, how much will that be,” you can confidently respond, “we received 3 quotes and the best value is $0.50 per house or $3,125” (Okotoks caps their population at 25,000, assuming 4 individuals per house, there are 6,250 houses in Okotoks). That response, as opposed to “I don’t know” or “Um, we’ll get back to you on that” increases your chances of getting close to the budget you asked for.

So which do you prefer, incremental or zero based budgeting? How are you doing more with less going into 2010?

Special thanks to Amy, who inspired this post.