Budgeting & Forecasting

The 4 main types of budgeting are Incremental, activity-based, value-prop, and zero-based

Incremental budgeting is when small percentage-based changes are made to the prior period's budget information (typically from the last 12 months) rather than yearly creating an entirely new spending plan.

Activity-based budgeting is a top-down method where the FP&A team allocates resources based on the activities that need to be done, considering the cost of materials, labor, and other expenses associated with each activity. It's used for streamlining costs by analyzing each action a company takes.

Value-proposition budgeting is a method in which companies analyze the cost versus benefit to identify which activities provide the most value and where resources should be allocated.

Zero-based budgeting uses a bottom-up method where all expenses must be justified for each new period. Every expense is analyzed and allocated based on its contribution to the organization's objectives.

The four basic forecasting methods are straight-line, moving average, simple linear regressions, and multiple linear regression.

Straight-line forecasting is for when a company shows consistent growth (or decline) over time and can show a simple snapshot of potential future performance.

Moving average forecasting is used to understand underlying trends by smoothing out short-term fluctuations and highlighting potential long-term trends.

Simple linear regression shows the relationship between a specific business driver and a financial outcome (ex: marketing spend and sales volume).

Multiple linear regression takes that further and examines how numerous variables may affect the forecast.