Budgeting Essentials: Types of Budgets
Coach Dan Dollevoet explains the different kinds of common budgets for small business and when they should be used.
I’ve worked with hundreds of small business owners, and most of them don’t actually hate budgeting—they just hate budgeting that doesn’t work.
How you budget matters just as much as what you’re budgeting for. The right method will help you stay on track, make better decisions, and avoid the guesswork that leads to stress.
There’s no one-size-fits-all approach. The best budget is the one that matches the way your brain works and your business runs.
Zero-Based Budgeting: Spend Intentionally
This is the most intentional (and sometimes the most tedious) approach. You start from scratch every period. Every dollar of revenue is assigned a purpose.
Let’s say your business goal is to have a profit of 25%. One month, you make $100,000. Using this method you would immediately take out your profit ($25,000), and assign the rest to specific expenses or investments. , You’re planning exactly, to the penny, how the remaining $75K will be spent.
That’s where the “zero” in “zero-based budgeting” comes from, when the budget is complete, you have zero dollars unaccounted for.
It forces discipline. I recommend it for business owners who are data-driven, or in a reset mode where every line item needs rethinking.
Incremental Budgeting: Tweak What’s Working
This is the most common method of budgeting we see,, and that’s for a good reason. It’s straightforward and flexible. You start with your existing budget, and adjust based on past performance and future projections.
This can work extremely well if your business is fairly predictable. But watch-out! Without regular reviews, outdated expenses and inefficient habits can quietly pile up.
Activity-Based Budgeting: Build It From the Ground Up
This method is ideal if your business is project or production-based. Instead of starting with revenue, you start with how many services you’ll deliver, hours you’ll bill, or products you’ll produce.
From there, you assign costs to each activity and build your budget accordingly. It takes more effort upfront, but gives you a clear line of sight into what’s driving your spending, and whether your pricing supports your goals.
It’s a great way to connect operations to profitability.
Flexible Budgeting: Adjust as You Go
For businesses with fluctuating income, flexible budgeting provides structure without rigidity. You create a baseline, then revise based on what actually happens (revenue shifts, unexpected expenses, new opportunities).
This method works well in fast-changing environments or growth phases of your business, but you have to stay plugged in: review often and stay honest.
More important than the method you choose, what you need to remember is that if your current budget isn’t helping you make smarter decisions, it’s not doing its job, so don’t be afraid to switch it up.
Start with the method that feels right for you right now, and grow from there.
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Dan has 25+ years of experience helping businesses improve and optimize their operations. He combines his financial analysis and planning expertise to solve problems and help clients increase profitability.
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