Incremental budgeting is a type of budgeting that adds a certain amount of capital to a previous period's budget in order to allow for slight increases. This type of budget is simple, but it also is not generally recommended by most professionals. One of the biggest problems with this type of budgeting is that it often leads departments to spend more money.
How it Increases Spending
Different departments will spend as much money as they possibly can, according to the budget, so that they will make sure to get enough money for the next budget. The next budget will be based on the amount of spending from this period, so employees will often spend more money than they need with this in mind.
Advantages of Incremental Budgeting
One of the advantages of incremental budgeting is that it is very easy to implement. You will be able to work with multiple departments and there will not be too much discord between the departments. Also, this type of budgeting does not take a lot of detailed analysis to implement, where other budget require extensive analysis.
This type of budgeting is sometimes criticized because it does not take into effect anything that drastically changes in the business. It basically assumes that everything will stay the same with minimal changes.