1 00:00:03,310 --> 00:00:09,550 ‫In this section, we'll have an in-depth review of all three types of budgeting outside of zero based 2 00:00:09,550 --> 00:00:10,060 ‫budgeting. 3 00:00:10,630 --> 00:00:14,290 ‫There their advantages, disadvantages and how they are used. 4 00:00:15,040 --> 00:00:20,800 ‫Incremental budgeting With this particular method of budgeting, we are taking the current year's budget 5 00:00:20,950 --> 00:00:27,310 ‫and preparing it by making changes to the past year's budget, either by adding or subtracting based 6 00:00:27,310 --> 00:00:28,060 ‫on inflation. 7 00:00:28,810 --> 00:00:35,710 ‫Inflation can be described as the general increase in economic crisis over a period of time or time 8 00:00:35,710 --> 00:00:40,000 ‫can be as short as one day if compare to a supply and demand pull. 9 00:00:40,420 --> 00:00:47,080 ‫Historically, many companies monitor the economy over time to decide price increases for the upcoming 10 00:00:47,080 --> 00:00:47,380 ‫year. 11 00:00:47,890 --> 00:00:51,160 ‫So much of the new budget is based on inflated cost drivers. 12 00:00:51,670 --> 00:00:56,380 ‫I would like to give some real-life examples so that we can fully understand how incremental budgeting 13 00:00:56,380 --> 00:00:56,800 ‫works. 14 00:00:57,730 --> 00:00:58,990 ‫Let's take an example. 15 00:00:59,020 --> 00:01:00,700 ‫Based on someone's personal budget. 16 00:01:02,070 --> 00:01:07,590 ‫If they were using an incremental budget, of course, the next year, your budget may change if there 17 00:01:07,590 --> 00:01:13,860 ‫are cost of living increases associated with inflation, such as rent or higher utility bills. 18 00:01:14,580 --> 00:01:19,290 ‫If we're taking someone who has a real estate development company and they have a budget to create a 19 00:01:19,290 --> 00:01:25,890 ‫plain living community, this past year with the pandemic 2020 and all, we've seen many areas of inflation. 20 00:01:26,490 --> 00:01:28,410 ‫The price of lumber is one example. 21 00:01:28,920 --> 00:01:34,470 ‫So with the rising cost of lumber now we've seen the housing market prices soar, therefore creating 22 00:01:34,470 --> 00:01:39,150 ‫a higher price for new homes that are on the market due to increased cost of lumber. 23 00:01:39,870 --> 00:01:43,410 ‫And if we're looking at this from a monetary value, let's take 24 00:01:43,410 --> 00:01:49,920 ‫for instance, last year, your project budget was $1 million for this year, the expectation as an 25 00:01:49,920 --> 00:01:52,260 ‫increase of 10 percent and project cost. 26 00:01:52,890 --> 00:01:59,880 ‫Therefore, the budget is now $1.1 million, so we're adding on 10 percent or one-hundred thousand to the original 27 00:01:59,880 --> 00:02:01,620 ‫budget of $1 million. 28 00:02:02,310 --> 00:02:07,650 ‫Incremental budgeting as a common approach in business where management doesn't necessarily intend to 29 00:02:07,650 --> 00:02:13,770 ‫spend a great deal of time formulating budgets, nor do they see a need for there to be a thorough review 30 00:02:13,770 --> 00:02:15,570 ‫or re-evaluation of the business. 31 00:02:16,530 --> 00:02:18,450 ‫Many projects choose this approach if 32 00:02:18,660 --> 00:02:20,160 ‫no new assessments are needed. 33 00:02:20,220 --> 00:02:26,160 ‫From an operational standpoint, with this particular approach, there are, of course, advantages 34 00:02:26,160 --> 00:02:27,420 ‫and disadvantages. 35 00:02:28,020 --> 00:02:32,010 ‫Some advantages of incremental budgeting is really the simplicity of it. 36 00:02:32,850 --> 00:02:38,160 ‫The primary advantage of incremental budgeting is that it's based on recent financial results, and 37 00:02:38,160 --> 00:02:40,320 ‫the recent budget can be readily verified. 38 00:02:40,770 --> 00:02:42,600 ‫There's, of course, funding stability. 39 00:02:43,020 --> 00:02:48,450 ‫Typically, when you're looking at a particular budget from an incremental point of view, if a program 40 00:02:48,450 --> 00:02:54,180 ‫requires funding for a multiple period of years, incremental budgeting is structured to ensure the 41 00:02:54,180 --> 00:02:56,280 ‫funds will keep flowing into the program. 42 00:02:56,760 --> 00:03:03,300 ‫Seeing as how we're not only adding onto the budget based on inflation or also taking on a percentage 43 00:03:03,300 --> 00:03:06,660 ‫based off of that amount that was spent in the previous year. 44 00:03:07,640 --> 00:03:13,400 ‫Incremental budgeting allows for consistency with the dependence you have the number of budgets in prior 45 00:03:13,400 --> 00:03:14,060 ‫periods. 46 00:03:14,390 --> 00:03:19,250 ‫It's really ensure that the budget will remain consistent and stable over a period of time. 47 00:03:19,970 --> 00:03:25,010 ‫The incremental budgeting process is based on all of the allocation from the previous period. 48 00:03:25,730 --> 00:03:30,920 ‫Sometimes this approach can be a bit misleading, since it does not take into account some of the changing 49 00:03:30,920 --> 00:03:32,810 ‫circumstances which are immediate. 50 00:03:33,320 --> 00:03:38,750 ‫Those instances where people tend to spend at the current budget and have estimation for the next period 51 00:03:39,170 --> 00:03:41,870 ‫really brings about the phrase use it or lose it. 52 00:03:42,900 --> 00:03:43,860 ‫Disadvantages. 53 00:03:44,700 --> 00:03:47,850 ‫There are many disadvantages when it comes to incremental budgeting. 54 00:03:48,300 --> 00:03:49,680 ‫Let's evaluate a few. 55 00:03:50,400 --> 00:03:52,950 ‫Wasteful spending is a huge disadvantage. 56 00:03:53,100 --> 00:03:58,380 ‫Incremental budgeting since much of the New Year's budget is based on the previous year's spend. 57 00:03:58,830 --> 00:04:02,520 ‫There are times where projects or programs will tend to find ways to use. 58 00:04:02,520 --> 00:04:08,970 ‫The rest of the money does not necessarily allocate it with their overall program goal to ensure they 59 00:04:08,970 --> 00:04:13,530 ‫have the same amount of money, or at least that increase within the next year's budget. 60 00:04:14,160 --> 00:04:18,030 ‫Efficiency is definitely reduced when we're thinking about incremental budgeting. 61 00:04:18,720 --> 00:04:23,850 ‫Now there's not necessarily a reward for cost cutting or improvements, as we budget will automatically 62 00:04:23,850 --> 00:04:26,070 ‫increase every year based on inflation. 63 00:04:26,640 --> 00:04:31,740 ‫So it's not necessarily one of those items that are program manager can take back and say, Hey, we 64 00:04:31,740 --> 00:04:32,880 ‫saved the company money. 65 00:04:33,210 --> 00:04:38,760 ‫When this particular budget is always increasing. The incremental budget really doesn't take into account 66 00:04:38,760 --> 00:04:39,870 ‫the immediate change. 67 00:04:40,680 --> 00:04:46,680 ‫The method is based on the idea that expenses were run as they did before and within certain programs 68 00:04:46,680 --> 00:04:47,400 ‫and projects. 69 00:04:47,670 --> 00:04:52,290 ‫Of course, we're thinking about innovative programs, especially technology. 70 00:04:52,650 --> 00:04:54,510 ‫A cost is constantly changing. 71 00:04:55,080 --> 00:04:56,820 ‫Services are constantly changing. 72 00:04:57,240 --> 00:05:00,630 ‫What the options are that we're choosing are constantly changing. 73 00:05:01,110 --> 00:05:05,550 ‫So thinking about these different variables and what the cost of those variables will be. 74 00:05:06,030 --> 00:05:12,030 ‫This budget does not take into account if we're adding in a new variable component into a particular 75 00:05:12,030 --> 00:05:13,260 ‫program or project. 76 00:05:14,150 --> 00:05:20,480 ‫And finally, it's more use it or lose it of funds in this particular budgeting format are not carried 77 00:05:20,480 --> 00:05:22,040 ‫over into the next year. 78 00:05:22,820 --> 00:05:30,260 ‫Say if you have a program budget for $500,000 and the program only uses $400,000 at the end of the fiscal 79 00:05:30,260 --> 00:05:35,900 ‫year, the rest of that money is swapped out and one corporate accounting looks at the numbers for next 80 00:05:35,900 --> 00:05:36,470 ‫year's budget. 81 00:05:37,010 --> 00:05:41,060 ‫There are think that there really wasn't a need for that additional $100,000. 82 00:05:41,660 --> 00:05:47,630 ‫So one particular area may cost your budget to actually be reduced or certain cost components. 83 00:05:48,200 --> 00:05:50,780 ‫Let's review a sample of an incremental budget. 84 00:05:51,850 --> 00:05:56,770 ‫And the attached handout, you will find a template in a sample for an incremental budget. 85 00:05:57,720 --> 00:06:01,830 ‫Use these to review the drivers what you may see in an incremental budget.