Top 6 Budget Models in FP&A (And 1 That’s Gaining Traction)

Understanding Budget Models in FP&A

Budgeting plays a central role in Financial Planning & Analysis (FP&A), shaping how businesses allocate resources, control costs, and plan for the future. Choosing the right budgeting approach ensures that financial plans are realistic, data-driven, and aligned with business strategy.

The best budgeting model for a business depends on factors like industry dynamics, financial complexity, and growth stage. Some organizations benefit from structured, predictable budgets that provide stability, while others require flexible, real-time frameworks that adapt to changing conditions.

This guide explores six widely used budget models in FP&A, each with its own advantages and challenges, along with one emerging approach that is redefining how businesses approach financial planning.

The Most Common Budget Models in FP&A

Before exploring each budget model in detail, here’s a quick comparison of how they work, their ideal use cases, and common challenges. This table provides an at-a-glance reference to help you identify which budgeting approach best fits different business needs.

Budget Models At-A-Glance

With this high-level comparison in mind, let’s examine each budget model in more depth. Knowing when they’re used and understanding the mechanics, advantages, and trade-offs of each approach will help you apply them effectively in real-world FP&A scenarios.

1. Incremental Budget: A Practical Approach for Stability

Incremental budget models take the previous year’s budget and adjust it for factors like inflation, expected revenue growth, and cost increases. Many companies prefer incremental budgeting because it builds on past budgets rather than starting from scratch. 

Example: A manufacturing company using incremental budgeting might increase raw material costs by a set percentage based on supplier price trends.

Why Companies Use It:

• Straightforward to implement and doesn’t require complex recalculations.
• Works well for businesses with predictable cost structures.

Challenges:

• Inefficiencies can accumulate over time if unnecessary costs carry forward.
• Doesn’t account for major business shifts or new initiatives.

2. Rolling Budget: A Dynamic, Ongoing Approach

Rolling budget models continuously update over a 12- to 24-month horizon, adding new periods (months or quarters) as old ones close. This method provides a real-time view of financial performance, making it useful for companies that experience frequent changes in expenses or revenue.

Example: A SaaS company uses a rolling budget to update its revenue projections every quarter based on new subscription data, helping finance leaders refine forecasts and adjust hiring or marketing spend accordingly.

Why Companies Use It:

• Provides real-time financial insights for better decision-making.
• Offers more flexibility than static annual budgets.

Challenges:

• Requires continuous updates, making it more time-intensive.
• Accuracy depends on strong forecasting models and data analytics.

3. Zero-Based Budget (ZBB): Every Dollar Must Be Justified

Unlike incremental budgeting, which assumes previous expenses are still necessary, zero-based budget (ZBB) models require every expense to be justified from the ground up. Each budget cycle starts at zero, and spending must align with business goals and priorities.

Example: A company implementing ZBB for its marketing department requires each campaign to demonstrate expected ROI before receiving funding.

Why Companies Use It:

• Eliminates unnecessary spending and improves cost control.
• Helps prioritize high-impact initiatives.

Challenges:

• Requires significant effort to justify each expense.
• Can lead to overly aggressive cost-cutting, impacting long-term investments.

4. Driver-Based Budgeting: Connecting Budgets to Business Performance

Driver-based budgeting (DBB) focuses on key business drivers — factors that influence financial outcomes, such as sales volume, customer acquisition costs, and production efficiency. Instead of using historical spending patterns, you can use DBB to link budgets to operational metrics.

Example: A retail company using DBB adjusts its marketing spend based on expected customer foot traffic and seasonal sales trends.

Why Companies Use It:

• Improves forecast accuracy by linking budgets to real-world business activity.
• Helps FP&A teams adjust spending based on performance metrics.

Challenges:

• Requires a strong understanding of operational and financial data.
• Implementation can be complex for companies with multiple cost drivers.

5. Activity-Based Budget (ABB): Precision in Cost Allocation

Rather than setting a fixed amount for broad categories like “marketing” or “operations,” activity-based budget (ABB) models assign costs to specific business activities based on their expected impact.

Example: A company using ABB may allocate marketing funds separately for social media campaigns, trade shows, and content creation, ensuring each activity receives the appropriate resources.

Why Companies Use It:

• Improves cost transparency and control.
• Helps finance teams track ROI more effectively.

Challenges:

• Requires detailed tracking of cost drivers.
• Can be difficult to implement in large, multi-department organizations.

6. Project Budget: Managing Costs for Specific Initiatives

Project budgets are used to manage temporary, high-priority initiatives, keeping them on schedule and within financial limits. Unlike company-wide budgets, which allocate funds across departments, project budgets focus on specific goals with defined scopes, timelines, and expected outcomes. 

Example: A tech company developing a new product might set a project budget that covers research and development, UX/UI design, and software engineering. FP&A professionals would track spending at each stage, ensuring the project stays within scope and aligns with revenue forecasts.

Why Companies Use It:

• Ensures projects stay on budget and on schedule.
• Helps track profitability and financial feasibility.

Challenges:

• Requires strict cost monitoring to avoid overruns.
• Budgeting errors can jeopardize project success.

Beyond Budgeting: Niche But Growing in FP&A 

Some companies are moving away from traditional budgeting in favor of Beyond Budgeting. This model takes a decentralized approach that emphasizes real-time financial planning, rolling forecasts, and performance-based targets.

Example: A multinational corporation using Beyond Budgeting replaces rigid annual budget cycles with continuously updated financial targets based on market trends.

Why Some Companies Are Adopting It:

• Supports faster decision-making in dynamic industries.
• Encourages greater flexibility than static budgeting models.

Challenges:

• Requires a cultural shift and strong performance tracking systems.

Build Your FP&A Budgeting Skills for Career Growth

Understanding budget models in FP&A allows you to create more effective budgets and forecasts, anticipate cash flow needs, and support leadership with data-driven insights. These skills are invaluable for FP&A roles that require forecasting, cost analysis, and strategic planning.

Looking to develop your financial modeling skills? CFI’s FP&A Specialization equips you with hands-on training in budgeting, forecasting, and advanced modeling. Gain in-demand FP&A capabilities, earn an industry-recognized credential, and take your career to the next level!

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Additional Resources

Budgeting vs. Forecasting

How to Analyze Budget Variances with 10 Essential Questions

FP&A Modeling Best Practices

See all FP&A resources