Budgeting the Type of Budgeting

¶ … Budgeting

The type of budgeting method and standards defined within an organization reflect its priorities and the core set of business practices that support its business model. Base level budgeting is often used to extrapolate current levels of activity to future, anticipated levels of sales and production. Zero-based budgeting starts often for entirely new ventures, business units and product lines significantly different than existing product series. The business model of an organization will also dictate the frequency and depth of analysis each forecast includes as well.

Analysis of Budgeting Methods

In our organization, base level budgets are most commonly used as our business model is based on the predictability of a recurring or annuity revenue model. Approximately 70% of revenues are generated from multiyear contracts, which yield stability to the budgeting process. Base level budgeting drives the yearly forecasts that are presented to the CEO and board of directors at the beginning of every new fiscal year. Base level budgeting is also used for creating a time series of specific budget categories and comparing them to industry standards, including the percentage of budget invested in research & development for example. The base level budgeting approach is also carried to the individual department levels, including salaries and other key expense categories. This is because 70% of all incoming revenue is guaranteed through contracts and forms the foundation of the company's budgets. 30% of yearly revenue is from new sales, many of which also become contracts over the long-term. Base level pricing assumes an 80% capture rate of this secondary revenue stream, which is conservative yet provides a solid foundation to build off of.

Zero-based budgeting is used for entirely new projects and programs, including a recent investment in a new development platform and series of applications based on the Software-as-a-Service (SaaS) model. These investments are zero-based and provide for the development of technologies that are often patentable, which create significant barriers to entry in new markets the company is entering. Often the zero-based budgeting is substantiated with the potential of creating patentable products over the long-term.