Incremental budgeting

Incremental budgeting involves taking the previous years’ budget (or actual closing position for the previous year) and making adjustments with a ‘copy and paste’ method. Incremental budgeting is best suited to businesses in stable environments that aren’t growing rapidly or experiencing vast periods of change – for example, a large supermarket chain.

Advantages of incremental budgeting

• Easy
• Cheap
• No complex forecasting
• No significant management review time needed

Disadvantages of incremental budgeting

• Doesn’t allow business to adapt to changes around them, for example technological or social changes.
• Any inefficiencies will also be carried forward, for example having too many members of staff.
• Not very sophisticated.
• Encourages budget holders to overspend in order to use their full allocation and get that same amount next year.