Incremental budgets start with a certain amount allocated for a given area. After that, additional budget room needs to be applied for through a process (each company is likely to have a unique process.
How to budget using incremental budgets
Start out by identifying the “floor” for each area of the business. This could be determined by the previous years’ spend, the annual plan from leadership, or a specific commitment from the company.
Design and communicate the process for getting additional budget.
Let functional leaders determine how to spend their budget in order to achieve specific business goals.
The problem with incremental budgeting
Incremental budgeting is a great idea in theory because it gives functional leaders the freedom to do what they want. It targets a core problem of zero based budgeting that each item is up for debate, which can be exhausting and limit creativity.
However, incremental budgeting can cause complacency or laziness in the budgeting process. Since the process starts with budget floors, it can be tempting to just pick a random number or go off last year’s spend, even though times have changed this year. To avoid this problem, ask leadership to make their plans for the year and include a budget “floor” within them – that way you can get a gauge of how much the company is asking for.
The same process goes for project budgeting as well. If project managers ask for their “floor” and their “ideal” budgets, you can have a good conversation that, if done really well, won’t require any additional budget.