Here are basically four methods of budgeting, although most organisations are likely to prepare budgets using a combination

of these methods. The four basic methods are:

traditional historic budgeting zero-based budgeting priority-based budgeting activity-based budgeting.

Traditional historic budgeting This is the most common method of budgeting and is used in most financial institutions. It is based on historical information and involves an incremental approach. In simple terms, the managers take last year's figures and adjust for growth and/or inflation, plus or minus any significant changes in expected results. Most financial institutions have undertaken some form of cost reduction exercise within the last twelve months. In most instances, cost reduction initiatives consist of a directive from the Managing Director or the Finance Director stating that costs will be held at last year's levels (a cost reduction in line with inflation) or will be reduced by a fixed percentage. Those cost centre managers who have seen these kind of initiatives in the past will have padded their budgets to ensure reductions can be achieved without damaging the infrastructure of their departments. In this way, a traditional historic budget builds on unnecessary elements and encourages the vested interests of managers. This type of budgeting can be performed in several ways, the two extremes are: The bottom-up approach - unit managers prepare their own budgets and these are reviewed and consolidated by a central department. Changes are then suggested from the centre and eventually, after some negotiation, a budget is agreed. The top-down approach - an initial budget is prepared by the centre, with targets for each unit. This is then expanded by unit managers to form a detailed budget. In both circumstances, there is likely to be a planning gap between the performance levels considered achievable by unit managers and the expectations of senior management at the centre. The time taken to eliminate this gap through negotiation can be significant, but if this is not achieved and final budgets are imposed by central management then ownership of the budgets by unit managers will not be obtained. Zero-based budgeting Zero-based budgeting requires that expenditure above a zero base be justified and that costs be estimated for differing levels of output and service, i.e. that all expenditures be justified, not just additional expenditure. The major advantage of zero-based budgeting is that all proposed expenditure can be judged consistently and that optional and discretionary operations can be more closely scrutinised. It does, however, require significant management effort to evaluate each cost centre by service level and expenditure. The required level of data and number crunching can mean that the effort

can obscure the purpose. Some organisations perform this type of budgeting for selected cost centres and profit centres as a separate cost reduction exercise, maintaining regular financial control using traditional budgeting methods. Priority-based budgeting Priority-based budgeting is designed to produce a competitively ranked listing of high to low priority discrete bids for resources which are called "decision packages". A method of budgeting whereby all activities are re-evaluated each time a budget is set. Discrete levels of each activity are valued from a minimum level of service upwards and an optimum combination chosen to match the level of resources available and the level of service required. The concept of ranking bids for capital expenditure is well known; priority-based budgeting applies a similar process to more routine expenditure. It is similar to zero-based budgeting but does not require a zero assumption. Activity-based budgeting Activity-based costing information can be used in financial institutions as the basis for a variety of tools that will assist senior managers in the management of the cost base. It can be used as the basis of a regular means of managing the cost base by activity throughout the organisation. It may include the need to set targets or budgets for activities and costs, but tends to focus on longer term improvements in the delivery of activities which enable the institution to move towards its corporate goals through the monitoring of productivity, capacity utilisation, efficiency and effectiveness. It may therefore be used as the basis of an activity-based budgeting system. Activity-based budgeting differs from traditional budgeting in that it concentrates on the factors that drive the costs, not just on historical expenditure. The volume of activity, for example, will be a key driver of the costs within any operations function and the quality of customer service will have a significant effect on the costs associated with customer liaison. The strategic objectives can drive the budgetary targets and determine the volume of activities to be performed. The budgets are then derived from the activities using estimated cost rates. Activity-based budgeting justifies expenditure on the basis of activities performed in relation to the predetermined drivers and places responsibility for cost control on the manager with responsibility for the control of the driver. Activity-based budgeting separates the analysis of cost/benefit and value of activities from the more mechanistic budgeting exercise, reducing the complexity of the budgetary process and concentrating attention on the management of the business not simply on the costs incurred.

ADVERTISING BUDGET
The advertising budget of a business typically grows out of the marketing goals and objectives of the company, although fiscal realities can play a large part as well, especially for new and/or small business enterprises. As William Cohen stated in The Entrepreneur and Small Business Problem Solver , "In some cases your budget will be established before goals and objectives due to your limited resources. It will be a given, and you may have to modify your goals and objectives. If money is available, you can work the other way around and see how much money it will take to reach the goals and objectives you have established." Along with marketing objectives and financial resources, the small business owner also needs to consider the nature of the market, the size and demographics of the target audience, and the position of the advertiser's product or service within it when putting together an advertising budget. In order to keep the advertising budget in line with promotional and marketing goals, an advertiser should answer several important budget questions: 1. Who is the target consumer? Who is interested in purchasing the advertiser's product or service, and what are the specific demographics of this consumer (age, employment, sex, attitudes, etc.)? Often it is useful to compose a consumer profile to give the abstract idea of a "target consumer" a face and a personality that can then be used to shape the advertising message. 2. Is the media the advertiser is considering able to reach the target consumer? 3. What is required to get the target consumer to purchase the product? Does the product lend itself to rational or emotional appeals? Which appeals are most likely to persuade the target consumer? 4. What is the relationship between advertising expenditures and the impact of advertising campaigns on product or service purchases? In other words, how much profit is earned for each dollar spent on advertising? Answering these questions will provide the advertiser with an idea of the market conditions, and, thus, how best to advertise within these conditions. Once this analysis of the market situation is complete, an advertiser has to decide how the money dedicated to advertising is to be allocated.

BUDGETING METHODS
There are several allocation methods used in developing a budget. The most common are listed below:

Percentage of Sales method Objective and Task method Competitive Parity method Market Share method Unit Sales method All Available Funds method Affordable method

It is important to notice that most of these methods are often combined in any number of ways, depending on the situation. Because of this, these methods should not be seen as rigid, but rather as building blocks that can be combined, modified, or discarded as necessary. Remember, a business must be flexibleready to change course, goals, and philosophy when the market and the consumer demand such a change.
PERCENTAGE OF SALES METHOD Due to

its simplicity, the percentage of sales method is the most commonly used by small businesses. When using this method an advertiser takes a percentage of either past or anticipated sales and allocates that percentage of the overall budget to advertising. Critics of this method, though, charge that using past sales for figuring the advertising budget is too conservative and that it can stunt growth. However, it might be safer for a small business to use this method if the ownership feels that future returns cannot be safely anticipated. On the other hand, an established business, with well-established profit trends, will tend to use anticipated sales when figuring advertising expenditures. This method can be especially effective if the business compares its sales with those of the competition (if available) when figuring its budget. importance of objectives in business, the task and objective method is considered by many to make the most sense, and is therefore used by most large businesses. The benefit of this method is that it allows the advertiser to correlate advertising expenditures to overall marketing objectives. This correlation is important because it keeps spending focused on primary business goals. With this method, a business needs to first establish concrete marketing objectives, which are often articulated in the "selling proposal," and then develop complimentary advertising objectives, which are articulated in the "positioning statement." After these objectives have been established, the advertiser determines how much it will cost to meet them. Of course, fiscal realities need to be figured into this methodology as well. Some objectives (expansion of area market share by 15 percent within a year, for instance) may only be reachable through advertising expenditures that are beyond the capacity of a small business. In such cases, small business owners must scale down their objectives so that they reflect the financial situation under which they are operating.

OBJECTIVE AND TASK METHOD Because of the

COMPETITIVE PARITY METHOD While keeping

one's own objectives in mind, it is often useful for a business to compare its advertising spending with that of its competitors. The theory here is that if a business is aware of how much its competitors are spending to inform, persuade, and remind (the three general aims of advertising) the consumer of their products and services, then that business can, in order to remain competitive, either spend more, the same, or less on its own advertising. However, as Alexander Hiam and Charles D. Schewe suggested in The Portable MBA in Marketing , a business should not assume that its competitors have similar or even comparable objectives. While it is important for small businesses to maintain an awareness of the competition's health and guiding philosophies, it is not always advisable to follow a competitor's course.

MARKET SHARE METHOD Similar to

competitive parity, the market share method bases its budgeting strategy on external market trends. With this method a business equates its market share with its advertising expenditures. Critics of this method contend that companies that use market share numbers to arrive at an advertising budget are ultimately predicating their advertising on an arbitrary guideline that does not adequately reflect future goals. method takes the cost of advertising an individual item and multiplies it by the number of units the advertiser wishes to sell. aggressive method involves the allocation of all available profits to advertising purposes. This can be risky for a business of any size, for it means that no money is being used to help the business grow in other ways (purchasing new technologies, expanding the work force, etc.). Yet this aggressive approach is sometimes useful when a start-up business is trying to increase consumer awareness of its products or services. However, a business using this approach needs to make sure that its advertising strategy is an effective one, and that funds which could help the business expand are not being wasted. this method, advertisers base their budgets on what they can afford. Of course, arriving at a conclusion about what a small business can afford in the realm of advertising is often a difficult task, one that needs to incorporate overall objectives and goals, competition, presence in the market, unit sales, sales trends, operating costs, and other factors.

UNIT SALES METHOD This

ALL AVAILABLE FUNDS METHOD This

AFFORDABLE METHOD With