How does incremental budgeting function?

Incremental budgeting functions by using the previous year’s budget as a base. This approach allows organizations to take their established financial framework and make gradual changes, typically by adjusting for inflation or incorporating small increases and decreases based on past performance and expected future demands.

This method is particularly beneficial for organizations because it simplifies the budgeting process, as managers can focus on variances from the prior budget rather than justifying the entire budget from the ground up. By building upon an existing budget, organizations can maintain a sense of stability while allowing for necessary adjustments based on changing circumstances or priorities. This approach often reflects a pragmatic way to manage resources, as it acknowledges that existing programs and expenditures have established value, while still permitting flexibility to respond to new needs or challenges over time.