Incremental budgeting helps you build next year's budget by picking up where you left off. You start with this year's numbers and make the tweaks you know are coming. Most companies use it because it’s quick, familiar, and means you don’t have to redo every line item. If you’re juggling deadlines and departments, incremental budgeting keeps things moving without forcing you to rebuild everything every cycle.
But speed has trade-offs. When you lean on last year’s budget, you can accidentally carry over old problems or miss big shifts in your business. The trick is knowing when incremental budgeting works, how to adjust it, and when you need a deeper review.
Definition of incremental budgeting
Incremental budgeting means you use last period’s numbers as your starting point and then adjust for what’s next. Instead of justifying every expense from scratch, you zoom in on what’s changing, like inflation, new hires, or a new project.
The core formula is simple:
Current period budget = previous period budget + incremental adjustments + new expenses
You can make those adjustments a flat percentage, tweak specific line items, or tie them to business drivers (think headcount or revenue). However you do it, you’re just layering on top of what you already have.
This approach really shines in collaborative planning environments. Departments submit budgets fast, and finance teams pull them together without fuss.
The benefits of incremental budgeting
Incremental budgeting solves the problem of budgeting taking forever. Most teams spend 2-4 weeks on incremental budgets rather than the months required for zero-based budgeting. You spend less time in the weeds and more time making decisions.
This approach also gives you predictable costs. Department heads expect consistent funding with sensible updates when operations are stable. That clarity helps with long-term planning and reduces the tough budgeting conversations nobody enjoys.
It's easy to spot meaningful changes too. Since you build off previous data, it's simple to catch discrepancies. If you budgeted $100K for marketing and planned for a 10% bump but only see 5%, you know exactly where to look.
Incremental budgeting slashes admin work for busy finance teams. You don't ask every team to justify every dollar. You ask what's changing and why. This keeps your conversations focused and productive.
Methodology and approaches
Incremental budgeting isn’t one-size-fits-all. Different teams use different tweaks based on how their business works and how much detail they want.
Standard flat percentage approach
This one’s straightforward. You might bump all line items up 3% for inflation or pull them back by 5% to cut costs. Fast, but basic. It treats every expense the same.
Line-item incremental method
Now you’re tuning individual lines with specific assumptions. Maybe facilities jumps 2% for rent, subscriptions jump 8% from extra users, and salaries get adjusted for merit raises and new hires. More work, but way more accurate.
Inflation-adjusted incremental approach
Here you adjust for market trends. Apply 3.9% to salaries from benchmarks or 3.2% to utilities using CPI forecasts. Every category gets its own rate, all based on real data.
Driver-based incremental method
This approach links spending to metrics that drive your business. Support scales with your customer count. Cloud costs follow your revenue. Recruiting adjusts with headcount plans. Your budget tracks exactly with business growth.
Hybrid incremental zero-based approach
Many folks keep the incremental method for stable, recurring costs (like rent or insurance) and switch to zero-based justification for things like marketing campaigns or pro services. You get efficiency plus control where it counts.
Choose your approach based on your growth, how much change you’re managing, and how precise you need to be. If things are steady, a simple method works. If you’re growing fast or changing your business, you’ll want something more sophisticated.
Key components and considerations
To nail incremental budgeting, pay attention to a few essentials:
Selecting the right base period
- prior year actuals are clean, but sometimes out of date
- current year forecast is up-to-date but might carry over temporary changes
- approved budget is reliable but may not match what actually happened
Defining adjustment factors
Set clear rules for every increment:
- are you adjusting for inflation?
- what growth targets matter?
- do strategic priorities factor in?
Spell out your assumptions so team leads get why things changed.
Handling one-time expenses
Watch out for project costs sneaking into next year’s baseline. If you moved offices for $50K last year, don’t let that become your new normal. Pull out one-offs before adding increments.
Step-function costs
Some expenses jump in steps. One new teammate doesn’t change the rent. Twenty might mean a new lease. Same for software; you could pay the same until you hit a user threshold, and then pay more. Don’t assume everything grows smoothly.
Contractual changes and renewals
Build known cost jumps into your base. If your insurance is going up 12%, plug that in directly, not as just another percentage.
Growth and transformation challenges
If your company is growing fast or shifting strategies, your old numbers might be off. Use incremental budgeting for what’s stable, but plan in detail for changing areas.
Benchmarks and rules of thumb
You’ll find a few common rules when teams use incremental budgeting:
- most stable companies use 2-5% increases for basic cost growth or inflation
- high-growth companies often ramp 15-30% when budgets need to scale with sales or headcount
- budget cycles are usually 40-60% faster with incremental budgeting
- incremental works best on costs that change predictably such as rent, salaries, utilities usually accounting for 60-80% of spending
- the leftover 20-40% gets a closer look
- firms often set aside 5-10% for contingency or strategic reserves
- quarterly reforecasting keeps your budget up to date
These patterns help you gauge if your team’s on track or needs to dial in your process.
Common pitfalls
Incremental budgeting sometimes leads to issues. Here’s how to avoid them.
Perpetuating inefficient spending
The biggest risk: carrying forward costs that aren’t needed. If you spent $200K on a project last year and just add 3%, your new budget’s based on history, not need. Always tie increments to current operations.
Ignoring structural changes
If your business model shifts, like switching from field to inside sales, last year’s spending probably doesn’t apply. Reset your baseline when your strategy changes. Automating a manual process? Adjust your headcount budget for real savings.
Uniform increments across departments
Adjusting every team by the same percentage ignores real priorities. Sometimes engineering needs a 25% boost for new products, but finance gets only 3% for inflation. Align adjustments to business needs, not just routines.
Not separating inflation from growth
If you increase budgets by 5%, but 3% is inflation and only 2% is real growth, you’re not gaining much. Break out what’s for inflation and what’s new investment.
One-time expenses in the base
Big one-off expenses will skew your future budgets if you leave them in. Clean up your baseline so you’re not stuck paying for last year’s surprises.
Compounding inefficiency
Even small inefficiencies multiply over time. If your baseline’s bloated, annual increases just make it worse. Run zero-based reviews when you can to keep things lean.
Ignoring seasonality and timing
Timing matters. If you spent all your marketing budget in Q4 one year and Q1 the next, it’ll show a big year-over-year change that doesn’t really tell you anything. Adjust for timing when you set your baseline.
How to implement incremental budgeting in Runway
Runway’s planning platform takes incremental budgeting from idea to reality. You can build off real numbers, adjust transparently, and see changes over time. Here’s a step-by-step:
Step 1: import historical actuals as your baseline
Start by importing actuals from your accounting system, ERP, or HRIS. Runway connects to over 750 systems, including NetSuite, QuickBooks, and Salesforce. These numbers become your base for new adjustments.
Your data flows into tables in Runway, and forecast formulas create future values starting from your base. By default, these formulas copy last month’s value or add a growth rate, so your model’s always up to date.
Step 2: set up your forecast formulas
Configure your formulas to match baseline spending. For steady costs, that means repeating last period’s value. For expenses that track with business drivers, link them to headcount, revenue, or other key metrics.
This baseline reflects your actual run rate before you layer on changes.
Step 3: override specific periods with incremental adjustments
Use Runway to override forecast values on top of your formulas. Make a 4% merit increase, add a new hire, or update a vendor rate, just override the right months and tag it.
For example, say cloud costs are $50K a month and you expect a 10% hike in June. Just override June to $55K for your "Product Launch" plan. The rest of the year stays the same unless you change it.
Step 4: use plans to track and categorize changes
Link your changes to bigger projects. Tag each override, and see exactly how much comes from merit raises, new hires, or revenue growth in one place.
If multiple plans hit the same line, tag them both. This gives you full transparency on every budget move.
Step 5: spread adjustments across time periods
Stretch a plan across months for annual or multi-period spending. Add a $120K annual expense once, and spread it $10K per month, or weight it to your busy season.
For percentage increases, you can apply it and let it repeat across months, or use different rates as needed.
Step 6: create scenarios to compare increment options
Model different assumptions using Runway Scenarios. Try a 3% increase across the board, or different bumps by department. Run a scenario with driver-based scaling. Compare them side by side and pick what fits.
Each scenario stands alone, so you don’t risk changing your main plan. Merge your best scenario when stakeholders align.
Step 7: set up continuous reforecasting
Incremental budgeting pairs perfectly with ongoing reforecasting. Sync your actuals from your ERP or accounting system every month. Set monthly or quarterly checkpoints where you track variance between plan and results. Adjust your assumptions as you go, so your budget keeps up with your business.
This loop keeps your plan relevant so you’re never stuck on outdated info.
Step 8: document your increment logic
Use Runway’s planning pages to capture why you made each decision. When you override and tag a value, add a note on the business reason. These notes help during budget reviews and keep everyone on your team in sync.
The audit trail gives you quick insight if an increase didn’t deliver as expected, just check the plan history and learn from it.
Move forward
Incremental budgeting keeps planning simple when things are steady. It trims down the admin work and still lets you track and analyze spending in detail.
The magic is to apply increments thoughtfully. Base updates on your actual needs, not just what you did last year. Adjust by department and category. Separate one-time costs from recurring spend. Pair everything with regular reforecasts so you stay sharp.
Runway helps you build on real numbers, adjust everything transparently, and keep every change organized. You get fast budgeting with total visibility and full control. Stop firefighting and start leading.
Want to streamline your budget? Request a demo and see how you can take control of incremental budgeting and actually enjoy it.