Activity based budgeting, in contrast to traditional budgeting, creates an operationally feasible budget prior to generating a financial budget. It generates budget from activity-based models of companies.
This approach of budgeting focuses on the planning role of budgets in the belief that budgeting nowadays fail because it is too finance-focused and higher level that it overlooks other non-finance oriented goals of many organizations.
We have listed down the top 4 benefits of activity-based budgeting below
Budget insights allow better product, process, or activity costing and decision making, and better resource allocation to support priorities
Activity-based budgeting allows balancing operational requirements. This method tries to avoid calculating the financial effects of operationally infeasible plans unnecessarily. Since it generates a budget from activities and resources, it can highlight sources of imbalances, inefficiencies, and other areas for improvements which will then allow managers and employees to correct the inefficiencies.
Lower level managers and employees can discuss in operational terms instead of financial terms
Since it provides a clearer picture of how resources and activities are related, it can help managers and employees understand and communicate budget information in more tangible non-financial terms to help them understand better what is best done to improve and how to best perform their jobs. By improving the flow of activities and resources, it makes it easier as well to evaluate performance by being able to specify who is accountable for certain activities may overlap in several departments.
This type of budgeting allows managers to be more agile in terms of contingency planning, decision making, performance measurement, and evaluation.
Increased traceability and transparency that allows balancing capacity
With a more sophisticated operational model, it can enable a richer set of tools for balancing capacity. It becomes easier to adjust demands or changes in the amount of resources allocated and it is easier as well to adjust the activity or resource consumption rate because of the analysis of resource capacity done in this type of budgeting. This increased transparency and traceability of resource consumption can enable organizations to identify capacity issues so they can adjust in a timely manner.
Integration of budgets with other management initiatives
Activity-based budgeting tries to do away with vertical orientation. It instead endeavors a more horizontal orientation that is able to cut across borders within the organization. This allows integration of budgets with other initiatives like KPIs among others.
Activity-based budgeting tries to achieve a more complete and integrated operational and financial budget. Like any other budget approach it has its own limitations such as information availability or cost of creating or maintaining such information but one thing is for sure, it tries to improve what it has seen that didn´t work with traditional budgeting.
If you want to improve how you do your budgeting today, Performance Canvas offers you the most modern approach to budgeting to help you do away with political gaming, enhance your decision making, and improve performance flexibility.
DSPanel offers cutting edge technology platform for business analytics, planning, and visualization. DSPanel designs, builds, and operates with the end users in mind. Performance Canvas was created by DSPanel to answer the unarticulated needs of the market not addressed by previous available solutions. With Performance Canvas, information is transformed into valuable business insights for the business executives to utilize in their decision-making process. DSPanel currently has over 2500 organizations deploying their solutions.