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  • Writer's picturePeak Frameworks Team

Exploring Types of Budgets: Incremental, Activity-Based, Value Proposition, and Zero-Based

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The Types of Budgets

Budgeting is an essential financial tool that organizations utilize to allocate resources, control costs, and achieve their strategic goals. Different types of budgets cater to various objectives and industries, making it crucial to select the right approach for your organization.

Types of Budgeting
Source: Sketch bubble

In this article, we will discuss four common budget types: incremental, activity-based, value proposition, and zero-based. We will provide an overview of each method, discuss their pros and cons, and offer real-world examples to illustrate their applications.

Incremental Budgeting

Incremental budgeting is a traditional method that adjusts the previous period's budget based on inflation, revenue growth, or other relevant factors. This approach is often considered a "safe" option, as it relies on historical data and proven trends.

Key Features and Characteristics

  • Based on the previous period's budget

  • Adjustments are made for inflation, revenue growth, or other factors

  • Relies on historical data and trends

Pros and Cons of Incremental Budgeting


  • Simple and easy to implement

  • Requires less time and resources

  • Provides consistency and predictability


  • May not account for changing business environments

  • Can perpetuate inefficiencies or outdated practices

  • May discourage innovation

Real-world Example: Incremental Budgeting in Government Agencies

Incremental budgeting is commonly used by government agencies, as it provides stability and continuity in public services. For instance, the U.S. federal government often adjusts its annual budget based on inflation and economic growth rates.

Activity-Based Budgeting

Activity Based Budgeting
Source: EDUCBA

Activity-based budgeting (ABB) is a method that allocates resources according to specific activities and processes within an organization. This approach aims to improve cost efficiency by identifying the relationship between costs and the activities that drive them.

Key Features and Characteristics

  • Allocates resources based on activities and processes

  • Identifies the relationship between costs and activities

  • Focuses on improving cost efficiency

Pros and Cons of Activity-based Budgeting


  • Provides a better understanding of cost drivers

  • Promotes cost efficiency and optimization

  • Enhances performance measurement and management


  • Can be time-consuming and resource-intensive

  • Requires accurate activity and cost data

  • May not be suitable for all industries or organizations

Real-world Example: Activity-based Budgeting in Manufacturing

ABB has been successfully implemented in manufacturing companies, such as Caterpillar Inc., to better allocate resources and optimize production processes.

Value Proposition Budgeting

Value proposition budgeting prioritizes investments and expenditures based on their potential to create value for the organization. This approach focuses on maximizing returns by allocating resources to high-impact initiatives.

Key Features and Characteristics

  • Prioritizes investments based on value creation potential

  • Maximizes returns by allocating resources to high-impact initiatives

  • Encourages strategic thinking and alignment with organizational goals

Pros and Cons of Value Proposition Budgeting


  • Promotes strategic thinking and goal alignment

  • Maximizes returns on investments

  • Encourages innovation and growth


  • Requires a clear understanding of value drivers

  • May be challenging to implement in highly regulated industries

  • Can be subjective and dependent on management's judgment

Real-world Example: Value Proposition Budgeting in Technology Companies

Technology companies, such as Google and Apple, have successfully used value proposition budgeting to prioritize investments in innovative projects and new product development, resulting in significant growth and market dominance.

Zero-Based Budgeting

Zaro Based Budgeting
Source: Mint Intuit

Zero-based budgeting (ZBB) is a method that requires justifying every expenditure anew, starting from a "zero base" each budget period. This approach aims to eliminate unnecessary expenses and ensure efficient allocation of resources.

Key Features and Characteristics

  • Requires justification for every expenditure

  • Starts from a "zero base" each budget period

  • Focuses on eliminating unnecessary expenses

Pros and Cons of Zero-based Budgeting


  • Promotes cost efficiency and resource optimization

  • Encourages a critical review of all expenses

  • Allows for flexibility and adaptability


  • Can be time-consuming and resource-intensive

  • This may create uncertainty and instability

  • Requires strong commitment from management

Real-world Example: Zero-based Budgeting in Consumer Goods Companies

Consumer goods companies, such as Unilever and Procter & Gamble, have adopted zero-based budgeting to improve cost efficiency and allocate resources more effectively in competitive markets.

Comparing Budget Types

Factors to Consider When Selecting a Budget Type

When choosing the right budgeting approach for your organization, consider factors such as:

  • Organizational goals and objectives

  • Industry and market conditions

  • Available resources and data

  • Management commitment and support

Assessing the Alignment of Each Budget Type with Organizational Goals and Resources

Each budget type has its unique strengths and weaknesses. Incremental budgeting may be suitable for stable organizations seeking predictability, while activity-based budgeting is ideal for cost-conscious organizations looking to optimize processes.

Value proposition budgeting can help growth-oriented organizations prioritize high-impact initiatives, while zero-based budgeting may benefit organizations seeking cost efficiency and adaptability.

Tailoring the Budgeting Approach to Fit an Organization's Unique Needs

In some cases, organizations may choose to adopt a hybrid approach, combining elements of different budgeting methods to fit their unique needs and circumstances.


Understanding the various types of budgets—incremental, activity-based, value proposition, and zero-based—can help your organization allocate resources more effectively and achieve strategic goals.

By considering factors such as organizational objectives, industry conditions, and available resources, you can select the right budgeting approach to drive success and growth. Don't hesitate to reevaluate your current budgeting practices and consider adopting new approaches if needed. Your organization's financial future may depend on it.


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