Both zero-based budgeting and incremental budgeting are popular financial methods used by successful companies. Each method works differently and they both have their advantages and disadvantages associated with them. Here are a few basics of both methods.
Incremental budgeting always begins with the budget from the last period. Once there is an established starting point, if a department needs more money than the previous budget, they have to be able to justify the extra expenses. Also, if you do not use your budget, then the next period's budget will be reduced. This type of budgeting often leads to wasteful spending by employees because they do not want to lose their budget.
Zero-based budgeting always begins the new budget from an established point of zero. Instead of starting off with last period's budget and adding or subtracting from it, you begin with zero, and then go through every expense that you will incur during the course of business. This budgeting method utilizes much more detail and makes everyone accountable for their necessary expenses. The biggest drawback with this method is that it requires much more work to implement this method and it is often unpopular with employees.