Agile Budgeting Approach to Managing Money
A large number of people find it challenging to manage their money. The main reason managing money is a challenging task is the variations in consumer needs. Some human wants are unpredictable, and when they occur, an individual has to satisfy them. If the person was working on a tight budget, it would be challenging for them to manage the money that has already been planned for them.
People with a lot of money often hire financial managers to manage their money. If you do not have a lot of money, you can still learn various budgeting approaches that will help you manage your finances. Down below, you will find some of the best budgeting approaches, their advantages, and their disadvantages. If you practice these techniques, you will easily avoid being in a financial crisis.
Performance-Based Approach
This is a budgeting technique whereby funds are allocated based on specific objectives. Before commencing the budgeting process, an individual or organization has to identify the specific objectives that they wish to meet with the budget. This makes it easy for the planner to avoid allocating money to objectives that will not yield the desired results.
The goals or objectives have to be set depending on the available needs. Once the goals have been set, they act as a rationale for the activities that need to be undertaken and the cost of pursuing such activities. Therefore, the budgeting technique helps in building a result-oriented culture.
This budgeting technique is ideal for individuals that wish to carry out investments in the future. The technique helps identify the different goals involved in the investments and the cost that would be incurred. This means the person will easily include in their budget the amount of money they need to save.
The technique is also ideal for organizations because it facilitates growth. When an organization has set the right financial goals, it becomes easy for it to expand its operations. Most organizations use the Key Performance Indicators (KPIs) to facilitate this budgeting technique.
Disadvantages of Performance-Based Techniques
The main disadvantage of the technique is that it requires a lot of engagement, especially if used by organizations. It calls for the exacerbation of employee disengagement.
The method encourages subjectivity where the management has to make decisions based on their gut feelings. This might result in poor decision-making. When used by individuals, the same case can occur, especially if the person does not have prior knowledge about money management.
Advantages of the Performance-Based Technique
The process enhances accountability, especially in the case of organizations. The individuals responsible for achieving the objectives know all that needs to be done to ensure they are met. If the strategy is used by an individual, it can facilitate the development of a goal-oriented culture, which is an important aspect of money management. The individual also knows all the objectives that have to be met by the budget and, therefore, would be responsible for any success or failure regarding money management.
The technique allows the prioritization of key activities. When an individual takes care of the basic needs, they will find it less challenging to plan on how to satisfy other needs. The same case applies to organizations. If the key objectives are not met first, an individual or organization might end up in a financial crisis. For instance, one should not prioritize buying furniture over buying food. The technique, which is based on objectives, facilitates the identification of the most important goals and the goals that need to be met at a later date.
Activity-Based Budgeting
The activity-based budgeting techniques rely on the total cost of the anticipated activities. For instance, if you plan to go on vacation and buy a new car on a given date, your budget will depend on the amount of money you will require for these activities.
The budgeting technique requires the identification of all the activities that constitute a person's or organization's spending. Once such activities have been identified, the total cost required to facilitate them is then determined. This activity will facilitate the allocation of resources to meet the set targets.
The allocation of funds is also based on the efficiency of the activity. Therefore, this technique is known to facilitate growth in companies. Instead of starting the planning from scratch, individuals leverage activity-based evaluation to smoothen the process.
Disadvantages of the Activity-Based budgeting
The budgeting technique is costly because it requires the engagement of a large workforce. It has many workloads that need to be completed to ensure the effectiveness of the budgeting technique.
If you are seeking a budgeting technique to plan for the future, this might not be an ideal choice. The budgeting technique focuses on the long-term goals instead of the short-term goals. This makes it challenging for individuals or organizations to plan for the future.
Advantages of Activity-Based Budgeting
The technique ensures increased efficiency because it links every department and function with the spending. It offers a picture of the organization by outlining the various functions and the amount of money spent on such functions. The process makes it easy for organizations to seize opportunities as soon as they arise and close the performance gap.
The technique facilitates cost management, thus enhancing the functioning of an organization or household. Through the technique, people take into account all the activities that incur costs. This enables them to effectively manage money without leaving out any cost-incurring activities that might cause inconveniences in the future.
The other advantage of the activity-based technique is that it eliminates redundancy. The process ensures that any unnecessary activity is identified and action taken. It is an effective technique for people or organizations seeking to reduce waste caused by unnecessary activities.
Rolling Budgeting
This technique is also known as continuous budgeting. This is a technique where people have to make a new budget to replace the previous one. Companies that use this technique have to keep on adjusting their data to suit the new accounting period. When individuals use the rolling budget, they have to identify the new financial needs that need to be included in the budget.
The rolling budgeting technique is ideal for use by people that do not have a constant income. If a person does not have a constant income, it would be challenging to plan for the future. Such a person has to make a budget depending on their current income.
When used by an organization, the budgeting technique caters to all the dynamics in the company. For instance, if a company wishes to expand its operations, it means that it will have extra financial activities that need to be planned for. Therefore, the budget for the previous financial year would not be reliable in running the organization due to the financial changes that have been implemented.
The business environment is highly volatile, and therefore, this might be the best budgeting technique for any business. This volatility requires companies to predict the future and create a budget across a timeline. Such a budget is designed to create flexibility in the organization's planning process. It is ideal to use in organizations that can be highly affected by business volatility.
Disadvantages of the Rolling Budgeting
The only disadvantage of this technique is that it is time-consuming. The budgeting is done every month instead of yearly. When the budgeting is done every year, the workload is done over a short period, but if it is done monthly, many activities will be involved. Therefore, goals have to be identified each month, and this can be tiresome.
Advantages of the Rolling Budgeting
The technique enables organizations to stay ahead of the curve by predicting the changes, opportunities, and threats that might occur in the company. As a result, the company finds it easy to manoeuvre these changes whenever they occur.
The technique also allows for the financial plan's refinement and a broad strategy. This helps in the company's growth because it can redefine its financial plans to fit the available funds. In turn, the company would not operate on debt, and this is a good strategy for an organization that seeks to grow.
The rolling budgeting technique also helps in risk mitigation because it is based on scenario planning. It drives the decision-making process, thus making it easy for the organization to identify possible risks and mitigation strategies.
The technique enables people and organizations to align their strategic goals with the planning and budgeting process. It facilitates the setting of achievable financial goals and makes it easy for people or organizations to design ways to meet every goal.
Incremental Budgeting
As the name suggests, this budgeting technique involves the adjustment of the budget from the previous period. The change is implemented in terms of a percentage and could be an increment or a cutback. This decision depends on various factors that affect the company's profitability and running of operations. It is an effective technique that reflects the business's growth rate and the market changes.
Then the technique is ideal for businesses that operate in a steady environment. It uses historical data to determine the changes that need to be made to the budget. These organizations aim to maintain steady profitability and sluggish growth.
Given the volatility of the business environment, a large number of businesses do not like this method. It assumes a steady business environment with minimal competition. Such an environment is almost impossible to find in most industries. However, if a company is lucky enough to be operating in such a business environment, it can reap maximum benefits from the incremental budgeting technique.
Disadvantages of the incremental budgeting technique
The technique ignores the changes that might require a change of the entire system. It only focuses on the changes that occurred between the previous and the current accounting periods. It ignores the external landscape that might require a re-evaluation to facilitate organizational growth.
The technique creates the risk of budgetary slack. In some cases, managers might exaggerate the expenditure or underestimate the revenue to facilitate self-interest. Such manipulation can result in negative impacts on the operations of the firm.
The budgeting technique also creates the possibility of overspending. Managers might tighten the budget with the aim of accessing larger amounts of funds in the future than the required amount. This makes it challenging for the organization to cater to innovative ideas.
Advantages of the incremental budgeting
The main advantage of this technique is that it is simple and easy to implement because the resources for its implementation are always available. It involves using financial records from the previous year and is always accessible by financial planners.
The technique is also easy to standardize and does not require a lot of personnel to implement. Given that it is easy to implement, it only takes a little time to do so.
The method facilitates the constant flow of funds to the different organizational activities. It helps identify and resolve any issues that might arise in the company in the course of business.
Zero-Based Budgeting Technique
This technique requires businesses to develop a new budgeting technique from scratch. Such a strategy enables the company to align the company's goals and resources. It enables an organization to identify the activities that add value to the company and activities that need to be eliminated. As a result, the allocation of funds is made to activities to grow the company.
Its main aim is cost optimization and management. This is an important factor in the ever-changing business world.
Disadvantages of the Zero-based Budgeting Technique
The technique involves the use of many resources because the budgeting is done from scratch. It will, therefore, require extensive training of the involved personnel. This process can be costly and time-consuming.
Advantages of the Zero-based Budgeting Technique
The technique improves accuracy and efficiency by ensuring that the correct number of resources has been allocated to every activity. It focuses on the future and current needs, a strategy that facilitates organizational growth. The allocation of resources is also aligned with business goals.
Benefits of managing money
Managing money will enable you to cut down on impulse buying, which can result in money wastage. If you are working on a budget, you will not have extra money, especially when shopping.
Money management will make it easy for you to save. Many people find it challenging to save money because they consider themselves to have an insufficient income. If a person is not able to save money while they have a little income, it means that they have poor money-saving skills. Such an individual might also have challenges saving money once they have a huge income.
Managing money will help you track your expenses. This is a very helpful technique because it will help you reduce wasteful spending in the future. You will use the previous expenses to determine those which should be cut out from your budget and those that should stay.
The practice will also enable you to explore investment opportunities. Through money management techniques, you can identify the amount of money you will have saved over a specific period of time. You will identify reliable investment opportunities that could be utilized using the savings. The investments will earn you extra money, thus making it easier for you to satisfy your financial needs.
Money management will enable you to handle credit better and avoid situations that can result in overspending. A large number of people suffer from debt due to a lack of money management skills. If you do not want to be one of those people, it is important to manage your money wisely like an adult. This can be achieved by ensuring that you have a good credit score.
Money management facilitates early retirement. Nobody wants to work during their old age, and this can be best achieved through good money management strategies. Through money management, you can set achievable targets, and this will make it easy for you to retire early enough.
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In Conclusion
The above budgeting approaches have been proven to be the most effective in money management. Now that you have known what each approach entails, its advantages and disadvantages, it is advisable to choose one that suits your preferences. Every adult has managed money before. The only difference is the techniques they used in the money management process. This means that a lot of people know one or two things regarding money management.
Therefore, if you have managed money before, the above budgeting techniques will be of great help, and you will find it easy to implement them. Regardless of the amount you earn, you can always budget for it and have some left for savings and emergencies. If you feel like you only have the money to spend now, the above techniques will help you change that mindset. Through achievable goals, you can always budget for the little money you have without falling into debt. The most important thing to note is that you should not spend more than you have. If you do, you might find yourself in a financial crisis that you cannot recover from.