The Ten Types of Business Processes and Budgets
Posted: Sat Feb 01, 2025 9:13 am
The corporate budget is one of the most widely used tools by large and medium-sized companies to support business planning and control processes. Its importance is due to the various roles it plays, which range from developing the strategy to efficiently allocating the company's financial resources . Although there are some criticisms regarding some of its aspects , the benefits it brings to organizations are undeniably greater.
As companies have evolved, their organizational australia physiotherapist email database structures have changed, which has led to changes in their budget models. As a result, different types of business budgets have been developed and are used according to the particularities or management model of each business.
The various budget models used by companies can differ both in their structure and organization, as well as in the process they use to prepare their projections.
Below, each of the types of budget and processes that can be found in the business environment will be briefly described:
Static Budget : Prepared to project the next budget period, this type of budget is the reference for controlling operations throughout the year, and is generally the main basis for evaluating the performance of managers. It can be constructed using either the Bottom-up or Top-Down method, taking into account the strategic premises of the business. Because it is an important reference for evaluating the progress of the business, this type of budget is not changed throughout the execution period. This is done to enable the identification of possible deviations from strategy and the search for alternative corrections that may be necessary. Another reason for not undergoing changes during the year is its use as a basis for defining variable compensation for managers; ( Learn more about the Static Budget )
Flexible Budget : One of the criticisms leveled at static budgets is that, if there are large variations in the company's activity volume in relation to what was originally projected, distortions may be created in the actual versus budgeted monitoring process. As a way of eliminating these situations, some companies use this budget where, before carrying out any assessment, budget projections are updated for the actual volumes practiced. In this way, deviations resulting from volume changes tend to disappear and those generated by inefficiencies in the operation become evident. Its use allows control areas to avoid focusing their efforts on non-existent problems and to observe real deviations in the operation, which must be justified even when they refer to cost reductions, since there are some management decisions to be made based on their analysis . It should be noted that its use does not mean making goals more flexible; (Learn more about Flexible Budgets)
Incremental Budget : Some companies use this type of budget as a starting point for implementing their planning and control model. Its construction consists of using values from the previous fiscal year to prepare current projections. Its process is based on the collection of historical data from each of the control units for subsequent addition of a correction percentage, which can be either a fixed rate or an adjustment for inflation or even expected economic growth. Its use is associated with greater agility and speed in preparation and, consequently, lower preparation costs. On the other hand, it can generate superficial projections and the perpetuation of inefficient expenses; (Learn more about the Incremental Budget)
Zero-Based Budgeting : A major criticism of the budgeting process used by many companies is the use of values from the previous period as a basis for projections, plus adjustment percentages, a concept known as incremental budgeting. The first publication of the Zero-Based Budget was in 1970 by Peter A. Phyr in the Harvard Business Review, who was the manager responsible for its implementation at Texas Instruments in that same decade. The central concept of this budget is to prepare projections as if the company were being built from the ground up. To this end, all expenses must be rigorously assessed independently and with reasonable justifications in relation to the organization's objective. In this context, it is of fundamental importance that the objectives and goals are clearly defined so that the application of resources can be assessed according to their importance in relation to what is expected to be achieved. In this type of budget, activities are classified into decision packages, which represent an identification and assessment document with the aim of allowing them to be prioritized and a decision to be made on their approval or rejection. Its use promotes a review of all the company's processes with a focus on its objective, so that everything that is inefficient or unnecessary must be eliminated. One of the principles of this budget is to not allow the simple continuation of the past, requiring that everything be reviewed, in addition to requiring that any point to be included in the budget must be duly justified; ( Learn more about Zero-Based Budgeting and also about its Decision Packages)
As companies have evolved, their organizational australia physiotherapist email database structures have changed, which has led to changes in their budget models. As a result, different types of business budgets have been developed and are used according to the particularities or management model of each business.
The various budget models used by companies can differ both in their structure and organization, as well as in the process they use to prepare their projections.
Below, each of the types of budget and processes that can be found in the business environment will be briefly described:
Static Budget : Prepared to project the next budget period, this type of budget is the reference for controlling operations throughout the year, and is generally the main basis for evaluating the performance of managers. It can be constructed using either the Bottom-up or Top-Down method, taking into account the strategic premises of the business. Because it is an important reference for evaluating the progress of the business, this type of budget is not changed throughout the execution period. This is done to enable the identification of possible deviations from strategy and the search for alternative corrections that may be necessary. Another reason for not undergoing changes during the year is its use as a basis for defining variable compensation for managers; ( Learn more about the Static Budget )
Flexible Budget : One of the criticisms leveled at static budgets is that, if there are large variations in the company's activity volume in relation to what was originally projected, distortions may be created in the actual versus budgeted monitoring process. As a way of eliminating these situations, some companies use this budget where, before carrying out any assessment, budget projections are updated for the actual volumes practiced. In this way, deviations resulting from volume changes tend to disappear and those generated by inefficiencies in the operation become evident. Its use allows control areas to avoid focusing their efforts on non-existent problems and to observe real deviations in the operation, which must be justified even when they refer to cost reductions, since there are some management decisions to be made based on their analysis . It should be noted that its use does not mean making goals more flexible; (Learn more about Flexible Budgets)
Incremental Budget : Some companies use this type of budget as a starting point for implementing their planning and control model. Its construction consists of using values from the previous fiscal year to prepare current projections. Its process is based on the collection of historical data from each of the control units for subsequent addition of a correction percentage, which can be either a fixed rate or an adjustment for inflation or even expected economic growth. Its use is associated with greater agility and speed in preparation and, consequently, lower preparation costs. On the other hand, it can generate superficial projections and the perpetuation of inefficient expenses; (Learn more about the Incremental Budget)
Zero-Based Budgeting : A major criticism of the budgeting process used by many companies is the use of values from the previous period as a basis for projections, plus adjustment percentages, a concept known as incremental budgeting. The first publication of the Zero-Based Budget was in 1970 by Peter A. Phyr in the Harvard Business Review, who was the manager responsible for its implementation at Texas Instruments in that same decade. The central concept of this budget is to prepare projections as if the company were being built from the ground up. To this end, all expenses must be rigorously assessed independently and with reasonable justifications in relation to the organization's objective. In this context, it is of fundamental importance that the objectives and goals are clearly defined so that the application of resources can be assessed according to their importance in relation to what is expected to be achieved. In this type of budget, activities are classified into decision packages, which represent an identification and assessment document with the aim of allowing them to be prioritized and a decision to be made on their approval or rejection. Its use promotes a review of all the company's processes with a focus on its objective, so that everything that is inefficient or unnecessary must be eliminated. One of the principles of this budget is to not allow the simple continuation of the past, requiring that everything be reviewed, in addition to requiring that any point to be included in the budget must be duly justified; ( Learn more about Zero-Based Budgeting and also about its Decision Packages)