Incremental Budgeting Models Every Finance Manager Should Understand

Finance managers face constant pressure to create accurate budgets while saving time and avoiding complexity. Advanced methods like rolling forecasts and zero-based budgeting attract attention, but many organizations still rely on incremental budgeting models.

Why? Because they are simple, predictable, and practical—especially in stable industries.

In this guide, we’ll break down the main incremental budgeting models every finance manager should understand, along with their strengths, weaknesses, and real-world applications in 2025.

What Is Incremental Budgeting?

Incremental budgeting builds on last year’s budget by applying small increases or decreases to each category. Instead of starting from scratch, managers make logical adjustments for inflation, wage growth, or operational changes.

Example: If a company’s HR budget was $1 million in 2024, it might increase by 4% in 2025, reaching $1.04 million.

This process saves time while maintaining continuity.

Core Incremental Budgeting Models

1. Percentage-Based Incremental Budgeting

The most common model involves applying a fixed percentage increase (or decrease) across all departments.

• Example: A university adds 5% to every department’s budget to cover inflation.

• Best For: Stable organizations with predictable expenses.

• Drawback: Doesn’t account for department-specific needs.

2. Line-Item Incremental Budgeting

Each budget line item is reviewed and adjusted individually based on last year’s performance.

• Example: A hospital increases staff salaries by 3% but cuts supply costs by 2%.

• Best For: Organizations seeking slightly more accuracy without overcomplicating.

• Drawback: Still carries forward inefficiencies if not reviewed carefully.

3. Departmental Incremental Budgeting

In this model, each department proposes budget increases based on expected needs, with finance applying increments after negotiation.

• Example: A marketing team requests a 12% increase for campaigns, while IT gets 6% for system upgrades.

• Best For: Large companies with varied departmental demands.

• Drawback: Risk of departments exaggerating needs to secure higher allocations.

4. Inflation-Adjusted Incremental Budgeting

This model adjusts budgets based solely on inflation or cost-of-living increases.

• Example: A government education budget grows 4% annually, matching inflation.

• Best For: Public sector organizations and nonprofits.

• Drawback: Ignores efficiency improvements or business strategy changes.

5. Hybrid Incremental Budgeting

Some finance managers combine incremental budgeting with zero-based or activity-based models. Incremental provides the baseline, while selected departments undergo deeper review.

• Example: A company increases all budgets by 5% but applies zero-based budgeting to R&D.

• Best For: Firms balancing efficiency with stability.

• Drawback: More complex than standard incremental budgeting.

Pros and Cons of Incremental Budgeting Models

When Should Finance Managers Use Incremental Budgeting Models?

• Best For:

  • Government agencies

  • Universities

  • Large corporations with stable operations

  • Nonprofits managing predictable expenses

• Avoid When:

  • Operating in volatile markets (tech, startups, commodities)

  • Under pressure to cut costs aggressively

  • When innovation and efficiency are top priorities

Conclusion

For finance managers in 2025, understanding incremental budgeting models is essential. From percentage-based adjustments to hybrid approaches, these models remain valuable for organizations that value stability, predictability, and efficiency.

While they are not perfect, incremental budgeting models still matter—especially in governments, universities, and corporations where financial planning needs to be clear and manageable.

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