Quick Answer
Incremental budgeting takes last year's actual spend as the starting point and adjusts it by a percentage for growth, inflation, or strategic changes. Zero-based budgeting starts every line item from zero, requiring justification for every pound spent. Incremental is faster and simpler; zero-based is more thorough but significantly more time-consuming. Most companies use a hybrid approach.
Incremental budgeting is the most common approach. You take last year's actuals (or current budget), then adjust each line item up or down based on expected changes. Marketing spent £400K last year, you expect 5% growth, so next year's budget is £420K.
Advantages: Fast, simple, requires less management time, and produces budgets people are familiar with. Good for stable businesses with predictable cost structures.
Disadvantages: Perpetuates historical spending patterns. If last year included wasteful spending, this year's budget bakes it in. Does not force critical examination of whether each cost is still necessary.
Zero-based budgeting (ZBB) starts every line item at zero. Each expense must be justified from scratch based on current business needs. The marketing team must explain why they need £400K, what they will do with it, and what would happen with less.
Advantages: Eliminates legacy waste, forces alignment between spending and current strategy, and surfaces costs that have grown unquestioned over time.
Disadvantages: Extremely time-consuming. Can create anxiety and resistance among budget holders. May lead to short-term thinking if managers focus on defending existing spend rather than investing in growth.
Most well-run finance teams use a hybrid. Apply incremental budgeting to committed, low-variability costs (rent, core headcount, utilities). Apply zero-based principles to discretionary, high-variability categories (marketing, consulting, travel, events).
You can also rotate ZBB focus — deep-dive into marketing this year, technology next year, G&A the year after. This gives you the benefits of zero-based discipline without the full organisational burden every cycle.
Use incremental when: cost structure is stable, business model hasn't changed, you need a fast budget cycle. Use zero-based when: costs have grown faster than revenue, you're restructuring, entering new markets, or under PE pressure for cost optimisation.
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FAQ
Neither is universally better. Incremental is faster and works well for stable businesses. Zero-based is more thorough and works well for cost transformation. Most companies benefit from a hybrid approach that applies each method where it fits best.
Start with one or two discretionary cost categories in your next budget cycle. Apply ZBB to marketing or travel while keeping other categories incremental. Expand the ZBB scope over 2-3 budget cycles as your team builds capability.
Not always. ZBB can reveal underfunded areas as well as overfunded ones. If a department has been under-resourced relative to its growing responsibilities, ZBB will surface that gap. The goal is optimal allocation, not just cost reduction.
Activity-based budgeting (ABB) allocates costs based on activities and their cost drivers (e.g., cost per customer onboarded x number of customers). It's a more sophisticated form of driver-based budgeting and can be used within either incremental or zero-based frameworks.
Grove FP supports both approaches. For incremental budgeting, prior-year actuals auto-populate templates. For zero-based, you can build from blank templates with justification notes. The driver-based formula engine supports any methodology.
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