Understanding Budgeting Approaches in Higher Education

Every higher education institution – whether a sprawling state university or a small private college – must answer a fundamental question at the start of each academic year: how do we plan our finances? The answer shapes everything from faculty hiring to infrastructure development to student welfare programs. While the term “budget” might seem like a dry administrative exercise, the approach an institution takes to budgeting has real consequences for the quality of education it delivers. There are four major approaches that universities and colleges commonly rely on: incremental budgeting, revenue-based budgeting, zero-based budgeting, and supplemental budgeting. Each carries distinct strengths, limitations, and contextual relevance – especially in the financially complex landscape of developing countries.

Why budgeting approach matters in higher education 🔗

Higher education institutions manage remarkably diverse cost centers – faculty salaries, research programs, student housing, libraries, digital infrastructure, and more. As BoardEffect notes, a budget brings all of an institution’s income and expenses into a central place, giving administrators the full scope of revenue and spending while highlighting both ambitions and limitations. Without a clear budgeting strategy, institutions risk overspending, underfunding critical areas, or simply failing to adapt to changing needs.

The financial environment of higher education has grown increasingly volatile. According to a 2025 budgeting guide for higher education, roughly 66% of higher education finance professionals believe their current business models are unsustainable over the next five to ten years. Declining enrollments, unpredictable government funding, and rising operational costs mean that the choice of budgeting approach is no longer just an administrative decision – it is a strategic one.

Incremental budgeting: stability in a stable climate 🔗

Incremental budgeting is the most traditional and widely used model in higher education. The core idea is straightforward: the current year’s budget becomes the baseline, and only marginal adjustments are made – typically by a fixed percentage – to account for inflation, new initiatives, or changes in enrollment. Hanover Research explains that budget cuts under this model are generally applied across the board as a percentage of the institution’s historical budget.

Why institutions favour it 🔗

The appeal is clear. BoardEffect reports that many boards prefer the incremental model because it is stable, easy to implement, and allows for multi-year planning thanks to its predictability. A survey cited by Inside Higher Ed found that 60% of chief financial officers at U.S. higher education institutions reported using an incremental model – a figure that reflects just how deeply embedded this approach has become.

The University of Nebraska-Lincoln Budget Office describes its own model as incremental, noting that the prior year’s base budget is adjusted for enrollment figures, tuition rates, salaries, benefits, utility costs, and new program changes – a practical illustration of how the method works in practice.

The hidden costs of the status quo 🔗

Despite its popularity, incremental budgeting carries a significant weakness: it tends to lock institutions into spending patterns that may no longer serve current priorities. Unicus Decision Support describes a characteristic “lattice and ratchet” effect, where new programs are easily added during times of financial plenty but become nearly impossible to cut when pressure arises. In other words, the model accepts the past as a guide for the future – even when that past contains inefficiencies. It works best in a stable financial climate where the institution’s priorities are not undergoing significant change.

Revenue-based budgeting: planning from what you earn 🔗

Revenue-based budgeting builds the financial plan around projected income rather than previous spending. Instead of starting with last year’s allocations, administrators first estimate the revenues an institution expects to receive – from tuition, state appropriations, research grants, endowment income, and auxiliary services – and then allocate expenditures accordingly.

A more grounded approach to planning 🔗

A higher education management guide from Adventist Education notes that the first step in sound budgeting is to estimate revenue, typically based on the previous year’s actuals adjusted for expected changes in enrollment, tuition rates, and external funding conditions. For example, a school estimates revenue by multiplying the number of expected students by the applicable tuition rate. This grounds the budget in measurable, realistic projections rather than historical spending habits.

The Penn State University Office of Budget and Finance offers a concrete example: its revenue base is comprised of student tuition (approximately $1.7 billion), research facilities and administration revenue ($111 million), state appropriations, and investment income. These revenue streams are first identified and quantified before any expense allocations are made – a textbook example of revenue-based thinking.

Predictability – and its limits 🔗

The strength of revenue-based budgeting lies in its fiscal grounding: spending cannot exceed what the institution reasonably expects to earn, which discourages deficit-driven decision-making. However, as Limelight’s higher education forecasting guide points out, revenue projections themselves carry risk – particularly when institutions are heavily dependent on tuition. K38 Consulting’s university budget guide notes that college enrollment has dropped approximately 10% over the last decade, and demographic changes threaten to reduce tuition revenue further. Revenue-based budgeting, therefore, requires accurate and regularly updated forecasts to remain effective.

Zero-based budgeting: starting fresh every year 🔗

Zero-based budgeting (ZBB) takes a fundamentally different stance. Rather than treating the previous year’s budget as a given, every department begins each new budget cycle with a base of zero and must justify every expenditure from scratch. The University of Nebraska-Lincoln’s Budget Office describes this clearly: each unit evaluates its goals, justifies its activities based on their benefits, and explains the consequences if those activities are not funded. Priority rankings are assigned at successive levels of administration before final allocations are made.

A powerful tool for cost control 🔗

The primary strength of ZBB is its capacity to eliminate waste. BoardEffect notes that zero-based budgets require departments to be intentional about their spending, preventing the accumulation of discretionary expenditure that often goes unchallenged under incremental models. Some administrators also argue that ZBB forces units to re-align and clearly articulate their objectives in relation to institution-wide goals – a form of annual accountability that other approaches do not enforce.

Colorado Mountain College’s much-cited transition from incremental to zero-based budgeting, described by Inside Higher Ed, illustrates both the promise and the pain of ZBB. The college identified several sources of waste across its multi-campus institution – but the process also encountered stiff opposition from campus groups and demanded significant administrative effort over two years. The CFO described it as “a long and painful journey” that was nonetheless “definitely worth it.”

The demands of a clean slate 🔗

ZBB’s primary disadvantage is its resource intensity. ERIC’s review of zero-based budgeting in educational institutions notes that it demands considerable paperwork, time, and communication – and that developing and ranking decision packages can be genuinely difficult. For this reason, some experts recommend that ZBB be applied periodically – perhaps every four to five years – rather than as an annual exercise. Convene’s guide to budgeting models further notes that ZBB is most valuable when an institution is facing financial difficulties that demand a critical reassessment of all spending, rather than as a routine planning tool for financially stable institutions.

Supplemental budgeting: responding to the unexpected 🔗

Supplemental budgeting does not replace any of the above approaches – it is layered on top of them. It refers to the allocation of additional, unplanned funds during an ongoing fiscal year in response to emergencies, policy changes, or unforeseen needs that were not captured in the original budget. These funds may come from governing bodies, external donors, government grants, or internal reallocation.

Flexibility as a financial tool 🔗

The value of supplemental budgeting lies in its responsiveness. Institutions can quickly reallocate resources when a sudden infrastructure need arises, when a natural disaster disrupts operations, or when an unexpected enrollment spike demands additional faculty. In this sense, it functions as a financial safety valve – keeping institutions operational under circumstances that no budget cycle could have predicted.

The risks in developing-country contexts 🔗

However, supplemental budgeting carries significant risks, particularly in developing countries where financial systems are less stable. Research on budgetary challenges in higher education in Bangladesh, published in an ERIC-indexed journal, identifies inadequate governmental budgetary support and inefficient utilization of allocated funds as persistent structural problems – conditions that make supplemental budgeting a recurring necessity rather than an occasional tool. When institutions come to rely on ad-hoc funding as a core planning strategy rather than an exceptional measure, the risks multiply: funds may be misallocated without clear guidelines, long-term planning becomes difficult, and financial accountability weakens. In contexts where governance structures are fragile or political pressures influence fund distribution, supplemental budgeting can deepen rather than resolve institutional financial instability.

The critical takeaway is that supplemental budgeting works best when it is genuinely exceptional – deployed to address one-off events within an otherwise structured financial plan. When it becomes routine, it is a sign that the underlying budgeting framework needs reform.

Choosing the right approach – or combining them 🔗

No single budgeting approach is universally superior. Hanover Research notes that most institutions use a mix of centralized and decentralized elements across budget models, since each approach brings its own benefits and trade-offs. A state university, for instance, might use incremental budgeting for core operating functions, revenue-based projections for new program development, and zero-based reviews for departments facing performance concerns. Supplemental funding can then serve as a genuine backstop for genuine emergencies.

Huron Consulting Group emphasises that the most resilient institutions are those that foster active participation in financial management from unit leaders – building a broader base of financial literacy and data-informed decision-making across the institution. Whichever model is adopted, transparent communication with faculty, administrators, and governing boards remains essential for successful implementation.

What do you think? Given the financial realities facing higher education today – declining enrollments, unpredictable government funding, and rising costs – which budgeting approach do you think offers the best balance between stability and adaptability? And in the context of institutions in developing countries, how can administrators reduce dependence on supplemental budgeting while still maintaining the flexibility to respond to urgent needs?

References

1. https://www.boardeffect.com/blog/a-comprehensive-guide-to-higher-education-budgeting-models/
2. https://www.golimelight.com/blog/budgeting-and-forecasting-higher-education
3. https://www.hanoverresearch.com/insights-blog/higher-education/6-alternative-budget-models-for-colleges-and-universities/
4. https://www.insidehighered.com/news/2011/07/12/starting-zero
5. https://budget.unl.edu/understanding-budget/
6. https://www.unicusds.com/unicus-quick-tips/blog-post-title-three-wtpjf
7. https://www.adventist.education/wp-content/uploads/2017/10/Budgeting-in-Higher-Education.pdf
8. https://budgetandfinance.psu.edu/New-Approach-to-Budgeting
9. https://k38consulting.com/university-budgets-practical-guide/
10. https://eric.ed.gov/?q=incremental+AND+budgeting&pg=2&id=ED192634
11. https://www.azeusconvene.com/articles/types-of-budgeting-models
12. https://files.eric.ed.gov/fulltext/EJ1099459.pdf
13. https://www.huronconsultinggroup.com/insights/adapt-university-budget-models