How to Choose the Best Budgeting Methods for Your Business & Its Pros and Cons

As an MSME business owner, I know you’re already doing your best to keep track of your finances, probably looking at the whole picture when you plan your budget. That’s great!

But let me toss a couple of thoughts your way – 

1. Have you ever experimented with different budgeting methods, beyond what you usually do? OR
2. Have you tried creating a super-focused budget for specific parts of your business? For example, have you done a budget just for marketing? 

I’m guessing… It’s a NO…

Sometimes, zooming in on budgeting can show you gaps, leaks, hidden opportunities, and prepare you for surprises. And trust me, surprises come often in business.

So, what will you get from this article?

This blog will show you different ways to do business budgeting and how to create specific budgets for key business areas. 

Let’s start with the basics you need to know…

Why Every Business Needs a Budget?

It’s simple. A budget tells you where your money should go and helps you avoid getting lost in unnecessary expenses. Here are a few more reasons why you need a budget in your business…

• Smart Use of Resources 

A budget helps you use money wisely. Allows you to allocate financial, human, and material resources effectively. You can see where to spend more and where to save.

• Helps You Stop Overspending 

With a budget, you’ll know how much you’re spending, spot any wastage, and cut unnecessary costs before they become a problem, freeing up cash for essential operations.

• Helps Set Clear Goals 

It helps you set realistic profit targets and gives you a clear roadmap for achieving that profitability and maintaining long-term financial health while tracking progress to stay on course.

• Manages Your Cash Flow

It lets you forecast cash inflows and outflows so you don’t get caught in a cash crunch. Remember, the top reasons businesses shut down are running out of cash..

• Better Business Decisions 

With clear numbers in front, you can make strategic choices about growing your business, whether it’s regarding expansion, technology investments, or operational adjustments.

• Gets You Loans or Support 

When you need a business loan or investment from an investor, a solid budget shows the business’s credibility, that you’re organised, and that you’re a safe bet.

• Use Government Schemes

Many government schemes for MSMEs require proper financial records. A clear budget keeps you prepared and helps meet the eligibility criteria, so you don’t miss out on valuable support. 

A well-planned budget keeps your business on track, improves decision-making, and makes growth possible without chaos. But if you’re struggling to put these pieces together, you don’t have to do it alone.

Top 5 Budgeting Methods (With Pros and Cons)

Okay, so how should you actually do your budgeting?

There are a few ways, and there’s no single “best” budgeting method. The right choice among these budgeting methods depends on your business size, goals, industry, and how things run…

Let’s look at one of the most common methods.

Incremental Budgeting 

This is the simplest method. It involves taking last year’s budget and adding or subtracting a little for the new year, making small adjustments to account for expected changes in costs and revenues.

The Good Parts of This Method (Pros) – 

• It’s Simple and Fast – 

This budgeting method is very easy to implement and doesn’t require complex calculations. You’ll just need to tweak last year’s numbers.

• It’s for Stability – 

It gives you financial predictability, which is helpful if your business is steady and doesn’t change much from year to year. 

• Less Conflicts – 

Since you’re only making small changes, there are less internal disagreements over money, which also minimizes internal competition. 

The Downside of This Method (Cons) – 

• Hides Old Problems –

If you had inefficiencies and unnecessary expenses in last year’s budget, they just get carried over without question.

• Not Great for Fast-Changing Businesses –

This method looks backwards. It’s not well-suited for fast-paced or rapidly changing markets that need quicker shifts in operations. 

• Doesn’t Work for New Businesses –

If you’re a startup, you have no “last year’s budget” for making informed incremental adjustments, so this method won’t work well.

Zero-Based Budgeting (ZBB)

ZBB means you start your budget with a completely blank page every single year. You don’t carry forward last year’s numbers. Instead, you check if each expense aligns with current goals and priorities.

The Good Parts of This Method (Pros) – 

• Suitable for Controlling Costs –  

Because you question every expense in this, you very quickly identify and eliminate any unnecessary spending. This means more savings and better use of your money.

• Focuses on Today’s Goals – 

It forces you to focus your spending on what really aligns with the business’s strategic goals right now, making sure your money is only spent on your current priorities. 

• Makes You Work Smarter – 

You often discover better, cheaper ways to do things just by reviewing them closely, enhancing productivity and reducing costs.

The Downside of This Method (Cons) – 

• It Takes a Lot of Time – 

You and your team will need to sit down and go through every single cost. It can take valuable time away from running your actual business.

• May Ignore Long-Term Growth – 

Since you’re focusing on immediate financial concerns at the expense of long-term investments, you might cut costs like training because their benefits aren’t immediate.

• Can Create Stress – 

If your team feels like they have to defend and explain their budget needs constantly, it can cause tension and make them feel untrusted.

Activity-Based Budgeting (ABB)

ABB is a budgeting method that works around the actual use of your money in business. First, you identify the tasks your business needs to perform to succeed, and then you budget for how much each specific task will cost.

The Good Parts of This Method (Pros) – 

• Shows You Accurate Cost – 

It helps you see exactly how much it costs to produce a certain product or serve a specific customer. This shows which products or customers make you money.

• Improves Efficiency – 

By looking at the activities that drive costs, you can easily spot where you’re spending too much time or money and find smarter ways to work.

• Decision-Making Gets Better – 

ABB method gives you clear data to make better choices, which is especially helpful if you’re new to businesses that don’t have past budgets to rely on.

The Downside of This Method (Cons) – 

• Takes Time and Effort – 

It’s not the easiest method. It requires a deep dive into all your business activities, and you may need expert help or software, which could cost more.

• Needs a Lot of Data – 

ABB works best only if you have detailed numbers and information about your business tasks, which can be tough for a small team with limited resources.

Value Proposition Budgeting or Priority-Based Budgeting

This is a brilliant way to budget. You list all your activities and rank them by the value they bring to customers and to your big business goals. If an expense doesn’t add value, you question it and cut it. 

The Good Parts of This Method (Pros) – 

• Keeps You Focused – 

It ensures you use every rupee to reach your business goals and to keep your customers happy. It also ensures that resources are utilised effectively to maximize impact.

• Cut Unnecessary Costs – 

It helps you quickly determine which costs are essential and which don’t add value. This makes cutting unnecessary spending much easier.

• Makes Customers Happier – 

When you focus all your energy on what customers want, they notice. Happy customers mean a stronger position in the market against competitors.

• Save Money in Tough Times – 

When money is tight, this method helps you protect your cash by focusing on the absolute essentials that customers care about.

The Downside of This Method (Cons) – 

• Value Can Be Hard to Measure –

It can be challenging to determine how much value each activity really gives.

• Needs Time for Analysis –

To figure out what your customers truly value, you need to spend time and have accurate data to analyse your costs and goals. 

• Can Miss New Opportunities – 

By focusing only on what customers value today, you might potentially overlook new opportunities for innovation and growth.

Rolling Budget  OR Continuous Budget

A rolling budget always looks 12 to 18 months ahead into the future. As soon as one month ends (say, May), you add another month (next year’s May) to the end of the plan. So, your budget is always fresh and up-to-date.

The Good Parts of This Method (Pros) – 

• Adapts to Change Quickly – 

This is fantastic for a fast-moving market. Because you can quickly update your plan and react quickly to new opportunities or challenges.

• Always Accurate – 

Your money plan is more realistic and reliable because you use the latest numbers and real-world information, not guesses you made six months ago.

• Keeps you alert – 

It forces you to constantly check your progress, how your business is doing, and fix problems fast.

The Downside of This Method (Cons) – 

• It’s Time-Consuming – 

Updating the budget constantly every month takes a lot of time and discipline, which can be hard if your team is small or busy.

• Can Feel Like a “Moving Target” – 

If you don’t explain the changes clearly, your team may be frustrated. In this, good and regular communication is essential to keeping everyone on the same page.

• Might need software – 

To manage this budget well, you might need to invest in better software because changing the budget in a simple spreadsheet can get messy. 

Budgeting Methods in Specific Business Areas

Let’s look at how to apply budgeting to each area of your business, from getting customers to managing your team. Know that every department has its own needs.

Business Area	What Areas to Plan?	How to Plan it?
Marketing	Digital ads  Website fees Content creation Social media Promotions.	Set a clear goal  Choose your channels  Allocate money based on what it costs to reach that goal.
Operations	Team salaries  Rent Raw Materials  Equipment  Daily running costs.	List all your fixed costs and variable costs. Look for ways to be more efficient  Set a monthly spending limit Keep extra cash for emergency needs
Sales	Sales team salaries  Commissions & incentives Sales software (CRM) Discounts/offers	Start with a sales forecast Figure out the team and tools you need to hit that number.  Build your budget to support that sales target.
Human Resources	Salaries  Staff benefits  Hiring fees  Training  Staff engagement activities	Start with the cost of your current team. Ask managers if they plan to hire new people and add those costs. Factor in bonuses and benefits to keep your best people.
Management	Your own salary  Profit targets  Tools for oversight Emergency/business buffer fund	Define the company’s main financial goals for the year Review all other department budgets.  Make sure everyone’s plan aligns with the main company goal.
Accounts	Accountant fees  Software (like Tally/Zoho) Tax consultant fees Yearly financial statements	List all your yearly software subscriptions.  Ask your accountant to estimate fees for the year’s filings. This budget should be fairly predictable.
Legal & Contracts	Company registration renewals  Lawyer fees for contracts Compliance (GST, labour laws, licenses) IP/trademark protection if needed	List all mandatory government fees for the year. Use standard contract formats reviewed by a lawyer Keep digital & physical copies of all legal papers Plan a small just-in-case fund for unexpected legal needs

How to Pick the Right Budgeting Methods for Your Business?

Choosing the best budgeting method depends on your business’s size, stage, goals, industry, and even your team’s mindset.

Because at the end of the day, your budgeting method should reflect your business reality, not just financial theory. 

Here is the guide to help you navigate the process of selecting the correct budgeting methods for your business.

Consider Your Business Size and Stage of Development
Small, Stable MSMEs	Incremental Budgeting	Simple to use.  Builds on past budgets with minor changes
Growing MSMEs	Rolling Budgets Activity-Based Budgeting (ABB)	Helps you update your budget often as your business grows.

Analyse Your Industry and Market Dynamics
Stable Industries	Incremental Budgeting	Works well with predictable costs and revenues
Dynamic Industries	Rolling Budgets Zero-Based Budgeting (ZBB) Value Proposition Budgeting	Offers flexibility Supports rapid market response

Align with Your Company Goals and Strategic Priorities
Cost Reduction	Zero-Based Budgeting	Eliminates unnecessary spending and Justifies every expense
Efficiency Improvement	ABB ZBB	Analyzes and optimises cost drivers
Growth & Innovation	Value Proposition Budgeting  ABB  Rolling Budgets	Supports investment in future-oriented areas

Assess Your Data and Resource Availability
Limited Resources	Incremental Budgeting	Easy to manage. No need for much data or a big team.
Access to Good Data/Team	ZBB ABB	These give deeper insights but take more effort and time.

Reflect on Your Management Style and Company Culture
Top-Down Leadership	ZBB	Needs strong leadership to decide where the money should go.
Collaborative Culture	Bottom-Up Approaches	Let employees join in, build trust and ownership.

Determine Your Need for Accuracy and Control
Want Better Forecasts	ABBRolling Budgets	More detailed, so you get better numbers and plans.
Want Tight Control	ZBB	Every expense must be justified

Understand that your budget should work for you, and not the other way around.

You can mix these budgeting techniques for budgeting or take an expert’s help to build a budget for your business. 

Step-by-Step Process For You To Create a Business Budget

Ready to get started with budgeting? Follow this budgeting process to build a solid financial plan for your business. 

1. Step 1 –  Know Your Money Goals

Start by setting clear goals. Be specific, set a deadline, and keep it real. Don’t just say, “I want to grow.” Say, “I want to increase my sales by 20% in the next six months. These are called SMART goals, meaning they should be – 

• Specific
• Measurable
• Achievable
• Realistic
• Time-bound

Set both short-term and long-term goals.

2. Step 2 –  Look at Your Old Numbers

Look at your old financial records from profit & loss statements, cash flow reports and balance sheets. Don’t get bogged down by complicated terms. Just look at your numbers and ask yourself these simple questions – 

• When were you busiest? Did sales spike during festivals or a certain season?
• What were your biggest money-makers?
• Where did most of your money go? What were your biggest expenses?

Looking at this gives you a real, honest picture of your business. 

3. Step 3 –  Guess Your Income 

At this step, write down all the ways your business earns. This is to check your income forecast every single month. Are you on track? If not, you can adjust your spending early. So, how do you do it?

• Your past sales –  What did you earn last month? Or last year?
• Your current customers –  Who are your definite sales for this period?
• The market situation –  What’s happening in your industry right now?

This simple habit will keep you in control and help you avoid financial surprises.

4. Step 4 –  List All Your Costs 

Now, let’s figure out exactly where your money is going. It’s time to list every cost you expect in your business. Group them so it’s easier to manage.

• Fixed Costs 

These don’t change much, no matter how much you sell. For example, your office rent, your team’s salaries, insurance payments, and your monthly internet bill.

• Variable Costs 

These costs change based on how much business you’re doing. The more you sell, the higher they are. For example – Raw materials, shipping charges, sales commission, and electricity

• Capital Expenses 

These are large, one-time investments. For example, buying a new laptop or machine, major software for your business, or the initial costs of setting up a new product line.

• Contingency Fund

Save enough to cover at least three months of your regular bills. This helps you stay strong during tough times.

5. Step 5 –  Check Prices & Talk to Vendors 

Set a fixed time period when you’ll check all your regular expenses like rent, raw materials, packaging, transport, and salaries. 

• Check if you are getting the best price and deals from suppliers..
• If you are a loyal customer, you can ask for a better rate, especially if you’re a loyal customer.
• You can get a better deal by paying early or buying in larger quantities from the supplier.

6. Step 6 –  Make the Budget Sheet 

Now, let’s create your actual budget document. 

• Start by subtracting business total expenses from total income. That will show you if you’re expecting a profit or a loss.
• Based on the goals you set earlier, decide exactly where your money should go if it’s for marketing or buying some equipment. 
• Use a simple Excel sheet or software like Tally, Zoho Books, or QuickBooks. This can automate a lot of the work for you, making it easy to track your spending and see how you’re doing

7. Step 7 –  Plan Your Cash Flow 

This step is all about tracking the timing of your money. A cash flow projection shows when you’ll receive money and when you’ll need to pay. 

Here’s what to do – 

Grab a calendar or a simple spreadsheet. For each month – 

• List all the cash you expect to actually receive (customer payments, loan money, etc).
• List all the cash you have to pay out (rent, salaries, supplier bills, loan EMIs).

• Step 8 –  Double-Check Everything

Read through your budget one last time. 

• Check if the numbers make sense and match your business goals.  
• If you have staff, even just one or two people, show them the parts that affect them. They are on the ground every day and might spot something you missed.
• Make changes if needed so the budget is accurate and easy to follow.

• Step 9 –  Track, Compare, and Tweak

Your budget is not “set it and forget it.” It’s a tool to guide your money decisions every month. 

• At the end of every month, sit down for 30 minutes and compare your budget to your actual bank statement.
• This quick check-in tells you if you’re overspending or if sales are lower than expected, so you can fix problems early. 
• If your business or the market changes, update your budget. This way, you always stay in control.

Budgeting vs. Forecasting –  What’s the Real Difference?

While the terms are often used together, understanding the difference between budgeting and forecasting is important for financial planning. 

A Budget is your PLAN. A Forecast is your PREDICTION. Here’s a simple table to show you the real difference – 

Difference	Budgeting	Forecasting
Purpose	To set your money goals and a plan to reach them.	To guess what your future finances will look like based on current data.
Time Frame	Usually set for one full year	It can be for the next month, the next quarter, or even 3-5 years ahead.
Update Frequency	The budget stays the same unless something big happens.	You update it regularly (like every month or quarter) as new things happen.
What You Get	Gives a clear money plan – sales, costs, profits, cash flow.	Gives a best guess of what your future numbers might look like.
Where It Focuses	Looking inwards – controlling your day-to-day operations and hitting targets.	Looking outwards – seeing what might happen due to market trends.
How Flexible It Is	It’s a firm plan you commit to following.	It’s flexible and changes as you learn more about the market
Who Uses It	It helps you and your team stay on the set plan.	It helps you plan smart and manage risks ahead of time.
How You Use It	To manage your daily business and measure if you’re on track with your goals.	To make big future decisions and prepare for risks.

Conclusion

Now you know creating a budget for your business can help in controlling business expenses, help you plan for set goals, and avoid any sudden surprises. 

All you have to do is choose a budgeting method that fits your business and be sure to review it regularly. Remember, a good budget guides your decisions and keeps your business on track for success.

The most important step? Just start. Grab a spreadsheet or even a notebook. A simple plan is far better than no plan.

Your budget is set. But don’t stop at budgeting. Keep the momentum going! Click here to read our other blog articles on financial management and operational efficiency.