Budgeting: Various Types

We all do some form of budgeting, but when I looked back into my career history, it was interesting to see how the budgeting process varied. It almost seemed like there were different types of budgeting.

Historical Based Budgeting

When I was younger, this type of budgeting was probably the most common. The way it worked was to take the prior year budget and make incremental changes.

At the job I worked at, the process began with distributing the prior year budget and year to date actuals and requesting a new budget for the following year. It was an iterative process with back and forth between the budget owners and the executive office.

The hours were long and the process were manual. We keyed into the mainframe the desired budget numbers that came back from the field, and the business management reviewed the total result to see if the business returned with enough planned profit.

Where I worked, the hours were excessively long and probably management were not doing the budgeting process very well.

There was some forecasting but in retrospect, it was kind of a minor deal. If I remember correctly, we did those forecast at the end of the monthly close. Again, kind of a quick update.

Pricing Model Driven Budgeting

I moved to a new job where the budget was externally driven by the client instead of internally driven. We developed pricing models that would form the basis of the deal with a client. If we won the business (which we did), that pricing model would become the budget for the year.

In the outsourcing contract that we worked under which I believe lasted 5 years, we had to negotiate a new pricing model every year. Those pricing models became the basis of the budget that we tracked actuals against.

Instead of negotiations between business owners and senior management, the negotiations were between business owners and the client.

This outsourcing arrangement was pretty stable at the time. This stability made forecasting relatively easy as the headcount was not gyrating from month to month. It was at this time that rolling forecast was introduced.

Uncertain Project-Based Budgeting

The next company I jumped to was project-based IT consulting company. The projects were of a short duration (less than a year) so project managers really had to work at bringing in new projects.

Another company may have a different scenario where projects lasted longer than a year but the situation I found myself in was more uncertain. I once did an analysis of the projects and found that after 2 or 3 months, the total monthly value of signed contracts dropped precipitously.

Forecasting became much more fraught. Annual budgeting did not exist under the constantly changing active projects scenario. Instead of doing the budgeting or creating the pricing models (each project did have pricing models but not an annual one like outsourcing), we really focused on rolling forecast.

The finance folks at the corporate office probably did budgets but those out at the frontline business did rolling forecasts. I can imagine the corporate folks taking those forecasts and combining them with estimated budgets for corporate folks and determining whether we had a viable business.

Those are the types of budgeting/forecasting process I experienced during my career. I then turned to ChatGPT to see if there were other types of budgeting processes that I did not think of.

Zero-Based Budgeting

In this process, the budget turned to zero every year and the business had to build up the budget from scratch. Management had to justify each spending request.

To me, two issues stand out:

1. This approach would be more time consuming. It is easier to go from what has been historically spent in the prior year and make adjustments to the numbers.
2. I believe one would run the risk of forgetting some type of necessary expense because it happens once a year. Or maybe prepaid items would run out. Historical records to operate from is much easier.

You could cut costs though with this method.

Rolling Forecast/Continuous Budgeting

I actually was doing this, especially in the project-based consulting company, but ChatGPT brought this up so I thought I would include.

I will mention, this type of budgeting/forecasting probably tends to arise in fast changing industries, of which I was in. If the business was stable and did not change much from year to year, then the rolling forecast would add much value to the budgeting process. It would just take up time.

Driver-Based Budgeting

In some ways I did do this type of budgeting, if only tangentially.

The historical based budgeting a manufacturing refinery included inputs that drove the costs of running the plant. In that scenario, engineers were managing the inputs to match projected demand which was in turn were affected by prices.

Even in the project-based world, we had to keep an eye on the demand for our client’s products. Our driver was the client’s healthy demand for their products, although this was indirect.

Activity-Based Budgeting

I have heard of this but have never experienced this.

I suspect that this process is time consuming, but I don’t really know. In the fast-moving IT world, we need something that could be done much faster. The 80/20 ideology was probably dominant here.

ChatGPT says consulting and IT services use this methodology, so I’m curious as to the process of doing this. My understanding is that activity-based budgeting involves researching and digging deep into the cost flows to determine how to allocate the costs. You have to determine the cost for each activity in the process and that part seems time consuming.

Beyond Budgeting (or Agile Budgeting)

Okay, this one is really new.

Here’s how ChatGPT describes it:

This methodology sounds like a distributed budgeting that flies by the seats of the pants. Or maybe flying an airplane while repairing it.

We might actually be moving towards this type of world with the advent of AI agents and other new technologies. Things are moving extremely fast and we are relying on AI to help us make sense of it and to operate in this kind of world.

Closing Remarks

There is probably more but this is what I have picked up thus far.

I’ve explored my historical experience with budgeting and overlaid on top of that some ChatGPT inputs on other types of budgeting.

There are a couple of other things to note about budgeting and forecasting but that is enough for this post today.