The 4 Types of Budgeting Methods and Which One Will Best Suit Your Small Business

The word ‘budgeting’ can evoke stress in many business owners. This simple term can open up a plethora of complicated financial strategies with many different sources swearing that their method of handling money is the best. Well, the truth is, everyone is different and a budgeting method that is perfect for one person may be a complete disaster for you. But how do you know which one is the best fit? Keep reading as we review the 4 main budgeting methods to help you find a strategy that best aligns with your business and its goals.

Type 1: Traditional Budgeting

Traditional budgeting is one of the most common and oldest methods. It involves preparing a budget by using a previous period’s budget as a base and altering it according to the business’ changing financial situation and goals. 

As we mentioned in last week’s blog post, this type of method is difficult for new businesses since they do not have previous budgets to use as reference. This method works best for companies that have been operating for long enough to accurately determine what their various costs and revenue will be moving forward. 

Type 2: Zero-Based Budgeting 

This budgeting method is one of the simplest methods. It starts with the idea that all department budgets have a budget of zero and must be rebuilt from scratch.  Managers must be able to justify every single expense to help the company avoid any purchases that are not absolutely necessary. 

This type of budgeting method works well for companies that are looking to cut down on their costs or are going through a financial restructuring. This method can also be very time-consuming and is often not used in the long term. 

Type 3: Rolling Budgeting

A rolling budget is exactly what it sounds like; a continuous budget that is changed and updated regularly. It is often updated monthly rather than yearly. This method allows you to regularly review if your finances are aligning with your goals. 

This method is best for swift changing and unpredictable businesses. This includes changes in aspects such as regulations and customer preferences. For example, a clothing store goes through many changes each season and must constantly adapt to fluctuating fashion trends.

Type 4: Flexible Budgeting 

This method of budgeting involves adjusting your budget depending on revenue and cost changes throughout the year. Using this method can help your company account for expected unpredictability.  

This method works well for companies that are more prone to financial changes throughout the year. For example, an ice cream parlor would have more of its business in the summer months and would need to update its budget to align with its busier seasons. 

With all that said, although they are strong foundations, none of these methods can perfectly align with all of your business’ needs and goals. Every company has a different financial situation that requires its own specific needs. Luckily for you, there are professionals available to help develop a tailored budget that is unique to you and your business. Here at STEPS, we offer personalized budgeting services that can be developed specifically with your financial goals in mind. Learn more about our services on our home page or fill out the form on our contact page.