Incremental Budgeting: A Complete Guide for Finance Teams

Manual budgeting drains time and resources from finance teams. Many companies spend weeks preparing annual budgets, only to find them outdated within months. The challenge is finding a method that balances speed with accuracy.

This guide covers what incremental budgeting is, how it works, and when to use it. You’ll learn the advantages and disadvantages, compare it to zero-based budgeting, and discover how to improve your approach.

What is incremental budgeting?

Incremental budgeting uses the previous year’s budget as the base for the new year. Finance teams make small adjustments to account for inflation, growth, or known cost changes rather than building each budget from scratch.

This approach assumes that baseline spending is justified. Teams only review and adjust the incremental changes between periods. Some organizations call it “traditional budgeting” or “baseline budgeting.”

Unlike zero-based budgeting, which requires justifying every expense annually, incremental budgeting accepts historical spending as valid. The focus shifts from proving necessity to calculating appropriate adjustments.

How incremental budgeting works

Step-by-step process

1. Start with previous year’s data. Most organizations use actual spending from the prior year rather than budgeted amounts. This provides a more accurate baseline than planned figures that may have missed the mark.
   
2. Identify adjustment factors. Determine which factors will impact the upcoming year. Consider both increases like inflation and decreases from efficiency gains. According to FERF 2025, 56% of CFOs are budgeting for wage increases to match inflation.
   
3. Calculate adjustments. Apply percentage-based changes to baseline figures. These adjustments typically range from 2-10% rather than major overhauls. Department managers calculate their needs based on expected changes.
   
4. Review and approve. Department managers submit adjusted budgets to senior management. Organizations use either top-down approaches where executives set limits or bottom-up methods where departments build their own budgets.
   
5. Monitor and track. Compare actual spending to the adjusted budget throughout the year. Use variance analysis to identify where actuals differ from budget and understand why.
   

Common adjustment factors

Inflation adjustments account for cost of living increases and industry-specific inflation rates. These preserve purchasing power from year to year.

Headcount changes reflect new hires, planned reductions, salary increases, and bonuses. Labor costs often represent the largest budget component for many organizations.

Revenue growth expectations apply historical growth rates forward. If revenue grew 15% last year, the budget might assume similar growth ahead.

Known cost changes include expiring contracts, renegotiated rates, new facility costs, equipment purchases, and technology upgrades. These are specific, identifiable changes rather than assumptions.

Efficiency targets capture planned cost reduction initiatives and process improvement savings. Many organizations build in modest efficiency gains to drive continuous improvement.

Advantages of incremental budgeting

Simplicity and ease of implementation

Incremental budgeting is the easiest method to implement. Finance teams prepare budgets quickly by making small adjustments to existing line items rather than justifying every expense from scratch. It doesn’t require complex calculations or extensive assumptions.

The straightforward nature means even organizations without sophisticated financial planning systems can use this approach. Small finance teams or those lacking dedicated FP&A resources find it accessible and practical.

Time efficiency

The time savings are significant compared to other methods. According to the 2024 FP&A Trends Survey, only 35% of FP&A professionals’ time is spent on high-value tasks like generating insights. Too much time goes to data collection and validation.

Incremental budgeting addresses this by streamlining the budget process. Organizations complete budgets in weeks rather than months. Teams spend less time building and more time analyzing.

Predictability and stability

Changes are typically small and based on known trends or inflation. This makes it easier to forecast future financial needs accurately. Budgets remain fairly consistent and stable over time.

Funding remains stable for ongoing programs and operations. This stability helps with long-term planning and provides operational continuity year over year. Programs can plan ahead with confidence about their resources.

Reduced conflict and disputes

Most budget items carry over with only minor adjustments. There is less room for disputes during budget discussions because departments expect allocations to remain relatively stable.

Departments are less likely to compete aggressively for additional funds. This reduces internal politics and turf battles over budget allocations. Approval processes move faster with fewer contentious negotiations.

Operational stability and continuity

Funds keep going to programs that existed in previous budgets. Managers don’t need to compete for funding or prove the value of their projects continuously. This allows department managers to focus on execution rather than constantly justifying their existence.

For established programs with proven track records, this approach provides the funding certainty needed for effective long-term planning and consistent service delivery.

Works well for stable organizations

Incremental budgets work well for companies with stable costs and revenue. Many SaaS companies with subscription models can use actual performance to make only a few assumptions about future spending and revenue.

The method suits established corporations, nonprofit organizations with stable funding sources, government agencies, and public sector organizations with historical spending patterns. In these contexts, the assumption that next year will look similar to this year is generally accurate.

Disadvantages of incremental budgeting

Perpetuates inefficiencies and waste

Incremental budgeting tends to perpetuate existing spending patterns, even if they’re inefficient or outdated. When the budget is carried forward with minor changes, there is little incentive to conduct a comprehensive review.

Inefficiencies and budgetary slack automatically roll into new budgets. Since this method assumes the previous budget is accurate, inefficiencies easily carry forward. If a department overspent last year on unnecessary travel expenses, those costs might persist without proper scrutiny.

Encourages “use it or lose it” mentality

Departments may rush to spend remaining budget at year-end to avoid cuts next year. This creates artificial spending that doesn’t add value. Managers worry that underspending signals they don’t need their full allocation, leading to reduced budgets in subsequent years.

This behavior is counterproductive. Organizations should reward efficiency and cost savings, not penalize departments for coming in under budget. Incremental budgeting’s structure inadvertently creates incentives that work against cost consciousness.

Lacks strategic alignment

Budgets can drift away from organizational strategy over time. Since adjustments are incremental, there’s limited consideration of whether spending aligns with current strategic priorities. Departments funded five years ago for different business objectives may continue receiving funding even if those objectives are no longer relevant.

Strategic initiatives require funding that may not fit neatly into incremental adjustments. New priorities compete for resources with legacy programs that have the advantage of already being in the budget baseline.

Minimal innovation and change support

Incremental budgeting focuses on small adjustments rather than transformational change. This makes it difficult to fund new initiatives, experimental programs, or innovative projects that don’t have historical precedent. Organizations using this method may struggle to adapt quickly to market changes or competitive threats.

Innovation requires flexibility to shift resources dramatically. When budgets only adjust by small percentages, there’s limited capacity to fund breakthrough opportunities or respond to disruptive market forces.

Poor cost control and visibility

Since the process doesn’t require justification for baseline spending, costs that should be eliminated or reduced often persist. There’s limited visibility into whether spending delivers value or could be reduced without impacting operations.

Organizations miss opportunities to identify and eliminate wasteful spending. Without regular zero-based reviews, costs accumulate over time—each individually small but collectively significant.

Limited flexibility in changing environments

When business conditions change rapidly, incremental budgets become obsolete quickly. Economic downturns, market disruptions, competitive threats, and technological changes all require more dynamic responses than small percentage adjustments.

Organizations in volatile industries or undergoing transformation need budgeting methods that can pivot resources quickly. Incremental budgeting’s conservative nature becomes a liability rather than an asset during periods of significant change.

Can mask declining performance

When adjustments are based primarily on historical patterns, underlying performance issues may go unnoticed. A department consistently receiving 5% increases might be underperforming relative to what those resources should produce. Without deeper analysis, incremental budgeting can obscure problems that zero-based reviews would surface.

When to use incremental budgeting

Stable business environment

Incremental budgeting works best when revenues and costs are predictable. Organizations in mature industries with established market positions, stable customer bases, and predictable cost structures benefit most from this approach.

If your business model hasn’t changed significantly in recent years and you expect similar stability ahead, incremental budgeting provides efficiency without sacrificing accuracy. The time saved on budget preparation can be invested in analysis and strategic planning.

Well-established operations

Organizations with proven, recurring programs that have demonstrated value over multiple years can confidently use incremental budgeting. When historical spending patterns represent rational resource allocation, building from that baseline makes sense.

Established corporations, mature nonprofits, government agencies, and public sector organizations often fit this profile. Their core operations change slowly and incrementally, making this budgeting approach appropriate.

Limited resources for budgeting

Small finance teams or organizations without dedicated FP&A resources may lack capacity for more intensive budgeting methods. Incremental budgeting requires minimal training and can be implemented without sophisticated software or extensive financial modeling expertise.

For organizations where finance team time is the primary constraint, incremental budgeting offers a pragmatic path to adequate budgets without overwhelming available resources.

When NOT to use incremental budgeting

Rapid growth or transformation

Organizations experiencing significant change need more dynamic budgeting approaches. Startups scaling rapidly, companies undergoing digital transformation, businesses expanding into new markets, and organizations integrating acquisitions all require flexibility that incremental budgeting doesn’t provide.

During growth phases, historical spending patterns become less relevant predictors of future needs. The assumption that next year resembles last year breaks down when business models evolve or scale dramatically.

Cost-cutting or financial crisis

Zero-based budgeting is ideal when there is an urgent need for cost containment. Financial restructuring, economic downturns, and market disruptions all require budgets to be dramatically reduced. Incremental budgeting’s tendency to preserve existing spending patterns makes it unsuitable for aggressive cost reduction efforts.

Highly variable or cyclical businesses

Organizations with significant seasonality, project-based revenue, or cyclical demand patterns need more flexible budgeting approaches. Construction companies, retailers with extreme seasonal swings, and consulting firms with project-based work face too much variability for incremental methods.

Innovation-driven organizations

Companies where innovation and R&D are critical competitive advantages need budgeting methods that support new initiatives. Pharmaceutical companies, tech startups, and research organizations require flexibility to fund breakthrough opportunities rather than incremental adjustments to existing programs.

Dynamic competitive environments

In industries with rapid technological change, frequent market disruptions, or intense competitive pressure, the conservatism and inflexibility can cause organizations to fall behind. More agile competitors using dynamic budgeting can respond faster to market opportunities.

Incremental vs zero-based budgeting

The two most common budgeting approaches differ significantly in philosophy and execution. Each has strengths and weaknesses depending on organizational context.

Aspect	Incremental Budgeting	Zero-Based Budgeting
Starting Point	Previous year’s budget or actuals	Zero/blank slate each year
Time Required	Fast (weeks)	Slow (months)
Effort Level	Low to moderate	High/labor-intensive
Justification Required	Only for changes	Every line item
Focus	Adjustments and increments	Complete cost justification
Best For	Stable environments	Times of change/cost-cutting
Innovation Support	Low	High
Efficiency Detection	Poor	Excellent
Conflict Level	Low	High (competitive)
Strategic Alignment	Can drift from strategy	Directly tied to strategy

When to use each approach

If your business operates in an industry where things don’t change very much, incremental budgeting might be the best fit. You should be confident in your current approaches and practices. The method works when small shifts can accommodate any changes.

Zero-based budgeting is ideal when there is an urgent need for cost containment—financial restructuring, economic downturns, or situations requiring dramatic budget reductions.

Hybrid approach strategies

Many CFOs apply zero-based principles to discretionary or underperforming units while retaining incremental updates to core, stable functions. This balanced approach provides the benefits of both methods.

• Selective zero-basing applies zero-based budgeting to specific departments or cost categories like marketing, travel, and discretionary spending. Core operational costs like payroll, rent, and utilities use incremental budgeting.
• Rotating deep dives use incremental budgeting for most departments but rotate which departments undergo zero-based review each year. Over a 3-5 year cycle, every department gets thoroughly examined without overwhelming the finance team.
• Threshold-based approach uses incremental budgeting for line items below a certain dollar threshold but requires zero-based justification for larger expenses or new initiatives. This focuses scrutiny where it matters most.
  

How to improve incremental budgeting

Incorporate rolling forecasts

By combining incremental budgeting with a rolling forecasting approach, organizations can improve accuracy, agility, and responsiveness. According to an EPM Channel survey, only 42% of companies use a rolling forecast, suggesting significant opportunity for improvement.

Rolling forecasts track the critical KPIs that directly impact business performance and cash flow. This allows organizations to adjust throughout the year rather than waiting for the next annual budget cycle.

Add driver-based elements

Traditional incremental budgeting can be enhanced through driver-based expense projections. Focus on key business drivers such as sales volume, pricing strategies, or market trends. A driver-based approach ensures agility, collaboration, and alignment with what drives the organization.

Regular budget reviews and adjustments

Organizations should regularly review and adjust budget allocations rather than becoming complacent with historical data. Actively assess how current allocations align with strategic goals to ensure resources are allocated efficiently.

Schedule quarterly budget reviews to identify variances, discuss performance, and make mid-year adjustments when necessary. This prevents drift from strategic priorities.

Use automation and technology

Many FP&A teams use software solutions to accelerate the process. Modern financial software can manage multiple budget scenarios and provide transparency into how numbers change over time.

According to the 2025 AFP FP&A Benchmarking Survey, 100% of FP&A professionals use spreadsheets for planning and reporting at least quarterly. Tools like Coefficient‘s QuickBooks budget vs actual template can automatically pull historical data from accounting systems directly into spreadsheets.

This enables quick multi-year trend comparisons and speeds incremental adjustments significantly. Year-over-year comparison features help identify patterns and inform adjustment decisions with live data that stays current.

Build in periodic zero-based reviews

Supplement incremental budgeting with periodic zero-based reviews of specific departments or cost categories. Rotate which areas undergo deep scrutiny each year to prevent inefficiencies from becoming permanently embedded.

This hybrid approach maintains the efficiency of incremental budgeting while capturing the cost-control benefits of zero-based principles.

Stop wasting time on manual budgets

Incremental budgeting offers simplicity and speed for organizations in stable environments. It works well when historical spending patterns remain valid and changes are predictable. However, the method can perpetuate inefficiencies and limit innovation if used without regular reviews.

Organizations experiencing rapid growth, transformation, or operating in dynamic markets should consider alternative approaches or hybrid methods. The key is matching your budgeting method to your organizational context.

Modern tools can address many traditional limitations. Automation reduces manual work while rolling forecasts add flexibility. Get started with Coefficient today to pull live data from your ERP directly into spreadsheets and build budgets that stay current.