4 Most Used Budgeting Methods for Businesses

A budget is a crucial planning tool for every business. It estimates your future expenses, revenue, and profits. It helps you better control spending and identify situations where revenue may not be sufficient to cover expenditures. Moreover, a budget allows you to realize potential growth opportunities when you may have extra cash available to invest in new ventures.

This article will look into four different budgeting methods used widely among businesses and help you find the one that best suits your current situation and type of organization.

4 Types of budgeting methods: Which one is right for your business? 

Below are the most common types of budgeting methods that you may want to consider for your business.

Budgeting method #1: Incremental budgeting 

One of the most popular approaches is incremental budgeting. There’s no fixed formula for incremental budgeting – you simply change last year’s budget by an increment or percentage to obtain this year’s budget figure. 

This method focuses on small changes from the actual or budgeted results from the preceding period. It’s perfect when your primary cost-driving factors don’t regularly change. Without the need for complex calculations, incremental budgeting is the quickest of all budgeting methods. However, be aware that your company’s departments may overspend to avoid receiving a smaller budget the following fiscal year. It’s best to look into specific expenditures and spending habits to prevent any kinds of budgetary slack. 

Best for: Those who are limited on time but need a method that is  effective and reasonable. It’s also well-suited if you have an established business with predictable and consistent cash flow and financial activities. 

See also: How To Create a Business Budget with 7 Steps.

Budgeting method #2: Activity-based budgeting (ABB)

Activity-based budgeting (ABB) is a budgeting method in which every activity that incurs costs is tracked and analyzed to identify areas for improved cost-saving. After figuring out how to enhance cost-efficiency, a business will create a budget based on those findings. Companies typically employ this budgeting method to cut expenses, boost productivity, gain a competitive advantage, and improve overall operations efficiency. Rather than just using the past budgets to determine a new budget like the incremental budgeting method, the ABB system digs deeper into the company’s performance.

The ABB system gives you more control over the budgeting process. Since the budget uses relatively precise data for the projections, it helps managers align the budget with overall company goals much easier. Due to its complexity, the ABB method is more expensive and time-consuming to implement and maintain.

Best for: New companies without historical budgeting data should consider this method. The ABB method is also popular in major industries, like manufacturing, construction, and healthcare. Companies that are going under significant changes, such as new subsidiaries, large clients, business locations, or products, are likely to use the ABB technique as well.  

Budgeting method #3: Value proposition budgeting (VPB) 

Value proposition budgeting (VPB), or priority-based budgeting, is all about driving value. With this method, you go through every cost item to decide whether the value it brings justifies its cost. This allows your business to focus on true value drivers while avoiding wasteful spending. One of the main downsides of the VPB method is that value is not easy to determine as it depends on multiple factors like politics or economic trends. If there isn’t a clear understanding of value, business owners may make short-term decisions that negatively influence long-term goals. 

When preparing for the VPB method, businesses have to answer these essential questions:

  • Why are we spending this amount of money?
  • What value does it bring to our customers and stakeholders? 
  • Does the value outweigh the cost? 

Best for: This method best suits companies aiming to reduce unnecessary expenses and refocus on creating what customers want most. Many government entities also favor this budgeting method because it involves a lot of financial restructuring throughout the year, and VPB can help them identify which services are most valuable and most needed within the community.

See also: Are You Maximizing Your Business Budget?

Budgeting method #4: Zero-based budgeting (ZBB)

Zero-based budgeting (ZBB) is another common budgeting method. When applying the ZBB method, you assume that all department budgets are zero and must be rebuilt from scratch. In other words, past budgets’ numbers are not considered. Budget planners must justify every penny spent. The ZBB method is very strict, attempting to eliminate any expenses that do not contribute to the company’s profit. It’s difficult and time-consuming to carry out a zero-based budget, so many companies only use this approach on occasion.

Best for: This extreme budgeting method is very useful when a business has an urgent need to reduce cost, for example, a financial restructuring.  

The bottom line 

Employing a suitable budgeting method for your business is an effective way to save costs, increase productivity, and bring in more profits. 

By understanding the basics of commonly-used budgeting methods among businesses, you can gain a deeper insight into your own business’s situation to improve your financial performance. 

In order to determine your ideal budgeting method, it’s important that you have accurately recorded expenses. In order to do so, you need to have your receipts organized and stored safely.  

Shoeboxed can help you. 

Shoeboxed is a well-trusted tool to help businesses, freelancers, and DIY accountants store and organize their receipts. It is a software program that quickly and efficiently digitizes your receipts and documents. This app automatically extracts, verifies, and categorizes important data from your receipts, then stores them securely in the cloud. Most importantly, scanned documents from Shoeboxed are accepted by the IRS

Go paperless with Shoeboxed for FREE today!

5 Bad Financial Habits to Abandon in 2022

Last time, we talked about good financial habits you should start to build in order to have financial success. Today, to complete the picture, we’ve compiled a list of 5 bad financial habits that you need to avoid. Continue reading for useful tips and advice.

1. Shopping to boost your mood

Have you ever bought something you didn’t need just to make yourself happy? Raise your hand if you have. This action is often known as “retail therapy,” an effective stress reliever that many people use consciously or unconsciously to lift their mood when they’re feeling low. According to a 2011 study that looked at 407 adults in three different experiments, shopping positively affects one’s emotions. 

Unfortunately, if you consistently use shopping to cope with distress, it will become a habit. According to Ryan T. Howell, an assistant professor of psychology at San Francisco State University, buying repetitively can lead to continued spending despite “harmful emotional, social, and financial effects.”

As a result, the more often you shop after a stressful day, the more likely you are to shop again. Shopping to lift your mood in the short term establishes a relationship between happiness and material possessions. It’s also a link that might be difficult to break and will cause harm to your finances. 

A popular solution for pushing emotional spending to the curb is giving yourself a waiting time. For example, if you wait at least 48 hours before making any non-essential purchases, the desire to buy will usually fade after the joy of the moment has worn off. Or you can host a clothing or item share event with friends, and select items amongst a variety of things to satiate your browsing and selecting urge. Then, you trade items for free.

2. Spending on convenience

We all have some financial habits that make life easier, whether it’s picking up a cup of coffee on the way to work or a fast food dinner on the way home. A convenience buy might be a nice treat now and then, especially when you’re in a hurry. However, if you make convenience purchases regularly, the convenience will cost you.

Consider ditching a coffee on your way to work every morning by getting up 5 minutes earlier a few times a week to brew a cup at home. Similarly, instead of buying a fast food dinner, you could learn to make a few simple meals and enjoy them throughout the week. Small tweaks like these can add up to hundreds of dollars over a year. 

3. Using credit cards for points

A rewards credit card allows you to collect points on your purchases and redeem them for gifts or discounts later. Who doesn’t love this? But there’s a reason credit card companies offer those rewards, and it’s not out of generosity. Rewards encourage you to spend more.

However, credit card rewards are typically less rewarding than you think unless you use them wisely. For example, you usually can only score a little cashback on your purchases because many cards impose heavy restrictions. Besides, some credit cards have annual reward limits or restrict the highest cashback rates to specific expenditures (such as gas and grocery).

Chasing credit card points will eventually lead you to go deep into debt. Therefore, you should consider getting rid of this bad habit. 

4. Having no long-term plan for your debt

It can be scary to think about the money you owe, so some people try to ignore their debts. No one ever enjoys thinking about their debt. However, if you aren’t thinking about it, chances are you won’t be able to keep track of it. This behavior will cause you more late fees and interest charges, plunging you even deeper into debt.

Though debt seems intimidating, it doesn’t necessarily mean that there is no way you can tackle this issue. Keeping track of your debt is a great approach to get started on paying it off. To stay on top of things, create files for all of your receipts, bank statements, loans, and bills. There are several apps that can help you stay on top of what you owe and put you in the mindset to pay it off faster.

Shoeboxed is a receipt scanning and expense tracking app that allows you to scan your receipts and other documents and store them in the cloud. With Shoeboxed, you’ll have the big picture of your finances, including your spending and your debts. Shoeboxed empowers you to manage your finance more efficiently!

5. Not saving any money

Saving money seems to be an impossible mission for many. But if you can manage to set aside some money for the future, even a little bit, it pays off big time in the long run. It may sound paradoxical, but even if you’re in debt, you should get into the good habit of saving.

Saving provides you financial security. For example, if you have money set up for emergencies, you’ll be prepared if something unexpected occurs. In addition, saving allows you to take risks and invest for the future. 

It’s entirely up to you how much money you should set aside for yourself first. It’s great to have ambitious goals, but it’s also important not to overwork yourself. Start by creating a budget that includes only the absolute necessities (such as rent, utilities, and groceries), and then decide how much of the remaining money you want to save each month. Don’t forget to treat yourself sometimes!

The bottom line

We all have habits that we frequently engage in, whether it’s a daily fast food meal or occasional shopping. Those can seem harmless, but think about how they’ll affect your bottom line. Even small purchases of $1 or $5 build up over time. Therefore, recognizing and adjusting these bad financial habits can help you build more sustainable finances.

If you’re interested in entrepreneurship stories, business tips, or productivity tools, find more posts like this on the Shoeboxed Blog. Shoeboxed is a cloud-based software that helps individuals and businesses turn their massive paper receipts into digital data. With Shoeboxed, you can accomplish a variety of tasks: scan, store and organize receipts, manage expenses, store business cards and even track mileage for business travelers. It’s simple to install and easy to use. Give Shoeboxed a try today!

5 Good Financial Habits to Build in 2022

If you’re looking for the key to financial success, then we have the answer: financial habits ? good financial habits to be exact. Financial habits are the values, standards, routine practices, and rules people rely on to handle their day-to-day financial lives. They help you manage your money properly and respond quickly to financial decisions or issues.

If you want to know how to manage your finances more wisely, read on to find five good financial habits to build in 2022. 

1. Review and update a financial plan regularly

The first thing to consider when building good financial habits is a financial plan. It’s a document that contains information on an individual’s present financial situation, long-term monetary goals, as well as strategies to achieve those goals.

Your financial plan helps you assess, plan, and improve your present and future financial situations. It provides a snapshot of your present finance and your goals to develop an action plan that you can use to navigate financial decisions with ease.

Creating a financial plan, though, isn’t enough. It’s fairly important, if not more important, to evaluate and update your plan on a regular basis. 

A regular check at least once a month is a must to make the most out of your plan and enhance the chances of reaching your goals. It’s also recommended to update any important information at least every three to six months. It’s also important to update your plan when a major life event occurs, such as buying a new house, getting married, or finding a new job.

2. Set financial goals 

The most crucial step toward financial success is to set goals. You will not be able to measure your progress unless you have goals. When forming goals, it’s recommended to follow the “S.M.A.R.T” goals strategy: specific, measurable, achievable, relevant, and time-bound.

Here are a few examples of SMART financial goals: 

  • Pay off $20,000 of debt in 6 months 
  • Create a $15,000 saving account this year
  • Buy a $100,000 property in 7 years 

As you can see, these examples closely follow SMART principles, with each goal being measurable and time-bound. As a result, you can easily keep track of your progress and be able to reach your goals within the expected time. The SMART principle is specifically useful for making a goal as it points out any relevant factors associated with your goals. For example, a SMART goal “Pay off $20,000 of debt in 6 months” is definitely more powerful than a vague goal such as “pay off debt soon.”

3. Create a budget

Making a budget is another good financial habit to build because it ensures you’ll be spending money efficiently and not spending more than you can afford. A personal budget lets you know how much money is going in and coming out of your account every month. Without it, you may be spending more than you make — leading to a paycheck-to-paycheck lifestyle. 

When making your budget, keep in mind to include the amount of money you bring in every month from your paycheck, the money you typically spend on “needs” such as living expenses and groceries, and the expenses you allocate for “wants” like eating out, travel and shopping.

If you’re not sure where to start, consider these budgeting tips to help you get started.

4. Utilize an expense tracking app

A budget lets you know how much money you’ll get and spend each month. An expense tracking app, on the other hand, allows you to compare if the amount of money you expected to use is lower, higher or equal to what you actually spend.

Expense tracking apps are becoming more popular and are likely to completely replace manual expense tracking. It’s because by using an expense tracking app, you can improve productivity and reduce paper waste. Moreover, with expense tracking apps, you can scan and store your receipts on the cloud, which is more secure than keeping them in the physical form.

If this sounds like just what you need, start using an expense tracking app now! Shoeboxed is an expense tracking app that lets you turn your receipts into data and then organize, make reports and analyze your current financial position at any time and anywhere. It’s an ideal tool for individuals and businesses. Check out Shoeboxed and start your free trial today!

5. Build an emergency fund

In contrast to fixed expenses that recur every month with an amount you can anticipate and set aside, there are also unexpected expenses. This type of expense sometimes is impossible to foresee. For example, a leaking roof, a broken dishwasher, or even a surgery for your pet are situations when you have to let your money come out of your pocket without planning for it.

That’s why you have to build an emergency fund. An emergency fund is a safety net that ensures you don’t have to delve into other cash set aside for everyday needs. If you don’t have one, chances are you’ll have to “touch” the money set aside for credit cards or other bills to cover the emergency expense. 

Experts recommend creating an emergency fund that covers three to six months of living expenses. This is especially true if you only have one source of income. 

If you haven’t started working towards this financial habit, start putting money aside for emergencies, even if it’s just a tiny amount from each paycheck. You’ll be grateful in the long run!

The bottom line

There are many good financial habits you can start adopting this year. Some can be easy — like reviewing and updating your financial plan regularly while others are more demanding. And if you’re new to working towards these habits, it can be a little time-consuming and laborious. But it’ll pay off in the long run. 

If you’re interested in entrepreneurship stories, business tips, or productivity tools, find more posts like this on the Shoeboxed Blog. Shoeboxed is a cloud-based software that helps individuals and businesses turn their massive paper receipts into digital data. With Shoeboxed, you can accomplish a variety of tasks: scan, store and organize receipts, manage expenses, store business cards and even track mileage for business travelers. It’s simple to install and easy to use. Try Shoeboxed today!