Small Business Budgeting Methods: A Comprehensive Guide

Small business budgeting is important in order to avoid business failure. There are three main methods for budgeting. The method that you choose depends on the size of your company and management style.

Zero-Based Budgeting

Zero-based budgets are different than other types of budgeting because you have to start each budget cycle from scratch. It doesn’t matter how much money was spent for that year, or the quarter before the cycle. When you sit down to create the budget, you evaluate every expense item and decide how much to allocate to it. This allows you to allocate resources more efficiently.

This method works best for entrepreneurs, partnerships and companies with a small number of employees because resources are often limited. The information required to create a zero-based budget may also be extensive when you begin to consider dealing with several departments.

One of the problems with zero based budgeting is that it can be time-consuming. You have to justify each expense and research what everything costs. You may not have the time for this type of budgeting and may find another budgeting method more effective.

Bottom up Budgeting

If your management style encourages input from employees and collaboration, then the bottom up method of small business budgeting may be a great fit for you. Employees, typically managers or others in charged with running certain areas of the business, are given an opportunity to create a budget for their “department.” You approve or modify budgets based on the total resources you have available. Unlike zero-based budgeting, employees can refer to previous budgets to make decisions. It’s also an effective budgeting tool for team building.

The main problem with bottom up budgeting is padded budgets. Employees may fear that they won’t get the amount they want, and add a cushion to the budget as a result. You’re often left to examine an inflated budget that is not based on reality.

Top Down Budgeting

If you want to control the entire budgeting process with little input from others, consider the top down method for small business budgeting. With this type of budget, you create the budget and deliver it to employees to implement. You can use zero-based budgeting to determine all the activities required and set budget amounts. You can also use the traditional budgeting method of comparing previous budgeting cycles to the current one to determine the how much to allocate to each budget category.

The problem with top down budgeting is that you may not be the best person to determine the needs of each area. Your employees may have more relevant knowledge about the amounts required for each line item. Without employee input, you could end up with a budget that is not properly set in realistic terms.

All three small business budgeting methods are used by entrepreneurs and corporations. The type of budgeting that you choose will depend on the amount of control you want to retain. Also, the budget plans should take into consideration how much you trust your employees.