Q299 · When preparing an annual budget, should I…

Q299 · Category F: Fees, budgeting and financial planning (Q251–Q300)

When preparing an annual budget, you can choose from different approaches. The most common are incremental budgeting and zero-based budgeting. Incremental budgeting makes small adjustments to the previous year’s budget or actual expenditure based on expected changes, such as inflation or business growth. It is simple and quick, and suits established businesses with stable business models and little change in their operating environment. Zero-Based Budgeting (ZBB) requires every department or item of expenditure to start from “zero” in each new budget cycle and justify its necessity and reasonableness again. This approach is more complex and time-consuming, but can effectively prevent waste of resources and is suitable for companies requiring in-depth cost control or business restructuring.

📘 Regulatory basis

The law does not prescribe the budgeting method a business must use. Whatever method is adopted, the final budget should ensure that the company has sufficient resources to meet all its statutory obligations, including compliance, tax and labour responsibilities.

📗 Drew Tang's recommendations

For start-up pharmaceutical companies, we recommend adopting a “zero-based budgeting” approach in the first year and carefully justifying every item of expenditure. Once the business is stable, you can switch to “incremental budgeting” to improve efficiency. However, we recommend conducting a thorough “zero-based budgeting” review every three to five years to reassess the justification for all expenditure and prevent organisational rigidity and budgetary slack.

📕 Risk notice

The main risk of relying on incremental budgeting over the long term is that it may conceal deep-rooted inefficiencies and encourage the mindset that “if it was done this way last year, it should be done the same way this year”. The budget ceases to be a tool for optimising resource allocation and becomes merely a numbers game, gradually eroding the company’s competitiveness and profitability.

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When preparing an annual budget, should I use incremental budgeting or zero-based budgeting?

Plan Your Hong Kong Pharmaceutical Licensing Project with Drew Tang