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Activity-Based Budgeting

Posted on: March 12th, 2024

High-interest rates put a squeeze on many businesses.  Watching your cash flow has never been more important.  The benefits of activity-based budgeting can pay big dividends.

MLA provides solutions for small and mid-sized businesses.  We can help you create a budget that fits your needs and prepares you for leaner times ahead.  A good CFO can help you predict the financial future, and a budget is a key tool.

Activity-Based Budgeting

Activity-based budgeting (ABB) is a top-down budgeting approach that outlines the requirements to support the targets set by the company, regardless of prior data.  One example assumes a corporation is creating a brand-new product.  This requires additional costs associated with more intensive sales efforts, material costs, labor, and overhead.  ABB meticulously tracks, researches, and analyzes activities that lead to costs.  The goal of creating efficiencies and reducing costs is achieved by scrutinizing each activity and examining cost drivers.

Advantages of ABB include going beyond traditional budgeting processes, which often simply adjust prior budgets for inflation or business development.  It analyzes activities to eliminate unnecessary costs.  Companies are guided to achieve specific goals set by upper management.  Modifications can be made based on current events or climate.  This method is particularly valuable to newer companies that lack historical data or those companies expecting material changes.

ABB is time-consuming and labor-intensive and can become tedious and counterproductive if too much time is spent evaluating.  In other words, will the costs of implementation outweigh the benefits?  The larger picture can get lost in the process, as ABB can lead to goal-oriented thinking that is too focused on the short-term.  This strategy relies on future predictions that may not align with reality and may lead to cash flow concerns.  Finance professionals handling ABB need to have a thorough understanding of the business processes, which can be difficult in businesses with complex production cycles.

MLA offers experienced professionals who can help guide you through the activity-based budgeting process.  Contact us to learn more.