Rijad Osmankovic

Prof. Justin Kilker

Budgeting and Forecasting

March 25, 2023

for companies. This especially applies to companies that are new and that offer some of their

products and services that are already on the market. Such high competition and external

conditions in the market have led to the fact that companies need to think "outside the box" to

find a new way to operate successfully and break into the market. To itself in the market, every

company needs to manage its costs well. They must not allow their costs to rise and their

liquidity to come into question. Good cost management means allocating resources well and

rationally through the planning process.

The zero budgeting planning process is a method in which costs are analyzed and defined

for each new budgeting cycle, and with the new data thus defined, the budgeting process is

started. The author states that all managers of each sector within the company are involved in the

planning and create a budget from scratch as if there were none last year (Ibrahim, 2019). All

activities of a particular sector of the company are planned and all future costs are defined in

other as precisely as possible how much money will be needed to achieve each operational goal.

Zero budgeting has proven to be very effective in the past in big organizations that have applied

it. In the past, the problem arose in the fact that this is a very demanding method to perform, so

most organizations applied it only during times of crisis when costs had to be cut.

According to Maheswari et. al., the benefits of applying budgeting on a zero basis are reflected

in the following: it helps to create an organizational environment in which changes are accepted,

it helps managers to focus on the company's goals and tasks, it focuses more attention on the

future and less on the past, it helps when identifying inefficiency and outdated operations into the

company, provides a framework that ensures optimal utilization of resources according to

priorities in terms of business activities, can help motivate management at all levels, provides a
plan to work on when more financial resources are available, and establishes minimum

requirements for departments. On the other hand, the author also states, there are certain

disadvantages such as difficulties in defining decision-making units and "decision packages",

focusing on the justification of every detail related to costs, the need for manager training, the

volume of data in large companies can lead to neglect important information and the manager's

sincerity in evaluating the achieved results are called into question (Maheswari et. al, 2021).

It is common to encounter organizations that apply an incremental approach to budgeting.

Incremental budgeting involves determining a new budget by taking the previous budget as a

starting point. So, for example, when forming a new budget, the company can simply increase all

expenditure items by 5% by the general rate of inflation in the economy (like we applied in the

class presentation). It is a simple approach and reduces the amount of time spent in the budgeting

process. However, it also has some disadvantages: when the same level of increase is added to

many budget items, as in the previous example, it may turn out that it is less applicable to some

items and more applicable to others. While a general increase of 5% may be quite adequate for

some areas, other types of expenditure may be subject to lower or higher than average inflation.

Some departments or activities may be put at a disadvantage by such a broad and general

approach. Due to the application of the incremental approach to more than one budget period,

some parts of the budget may come into serious disparity with the conditions in the real world.

This approach requires little control of the budget, which can lead to repeated inefficiencies over

a long series of years. It is suitable for stable companies, where no significant change in costs is

expected. Here there should be good cost control and a limit on discretionary expenses (White, J,

2020).
 Value-based budgeting is a good tool when it comes to creating a personal budget

because it focuses on spending money on the things an individual may value the most in life.

Recording income and expenses, which experts call "keeping" a budget or "managing" it, is

important because it shows whether we are spending more than we earn, and it provides the

answer to the eternal puzzle – where the money is being spent. Most people are probably aware

of the larger monthly expenses, but there are often those that people haven't paid full attention to.

It is very important, to be honest, that dedicate time to this task for at least a month. According to

the experts, three months are optimal to see some regularities and to avoid excuses that an

individual started keeping records in the very month when he/she had a lot of expenses.

Analyzing the costs can be very useful, and interesting, to deal with the analysis of costs from

the aspect of wants and needs. Needs mean everything that a person cannot function without and

wants including everything that would be nice to have but is not necessary. There is an

interesting rule of 50/30/20 division that can be used. In other words, people spend 50 percent of

their money on their needs, 30 percent on their desires, and 20 percent they can put aside and

invest in their future, through, for example, savings. A budget is extremely useful for planning

how to reach financial goals, how to find the money that needs to be set aside for them each

month, and how to monitor where it goes.

The planned budget, as one of the basic accounting information aimed at the future, plays

a big role in projecting the state of the company. There are various methods of budgeting, but

they all have a common purpose and goal. Depending on the production model, emphasis is

placed on different activities of the company. Our company would use incremental budgeting

because, we are confident that our company budget will remain stable in the long term, with only

minimal changes.
 Work Cited

1. How to spend money mindfully. Truist. (n.d.). Retrieved March 25, 2023, from
https://www.truist.com/money-mindset/principles/budgeting-by-values/building-a-
values-based-budget 

2. Ibrahim M. „Designing zero-based budgeting for public organizations “Problems and

3. Maheshwari, S. N., Maheshwari, S. K., & Maheshwari, M. S. K. (2021). Principles of

4. White, J. (2020). (Almost) Nothing New Under the Sun: Why the Work of Budgeting
Remains Incremental. In Budgeting, Policy, Politics. Routledge.