What is an Activity-based Budgeting (ABB)?
Activity-based budgeting (ABB) is a budgeting technique that allocates funds to activities or projects based on their expected contribution to the organization’s success. This method is often used in e-commerce businesses to better understand the relationship between business activities and their associated costs. It ensures that activities are adequately funded for maximum efficiency and effectiveness.
Significance of Activity-based Budgeting (ABB) in E-commerce
ABB helps businesses understand where their funds are going and how much of their budget should be allocated to each activity. This helps them optimize their budget and prioritize activities most likely to deliver the highest return on investment.
The significance of ABB in e-commerce includes –
- Identify relevant business and customer activities – ABB aids in identifying operations or products incurring expenses or revenue for the business.
- Increased operational efficiency – ABB helps them accurately assess their current performance and allocate resources more efficiently than traditional budgeting practices.
- Better understanding – With ABB, e-commerce businesses can better understand their costs and assess the impact of their investments in marketing and other activities on their bottom line.
- Accurate forecasts – ABB also allows businesses to develop more accurate forecasts of future performance and make better decisions about resource allocation.
Prerequisites to Calculate Activity-based Budgeting (ABB)
Prerequisites to calculate ABB in e-commerce include –
- Financial data, including all costs associated with running an e-commerce business.
- A complete overview of the business profitability goals
- Defining specific activity categories necessary for running a business.
- Cost per activity includes any direct costs like labor charges, supplies, software and technology. This also includes indirect costs like overhead costs.
Use Case With Activity-based Budgeting (ABB)
Suppose a company is rearranging its financial system to increase profit rates. They implement activity-based budgeting and collect financial data to assign each activity required budget. Ultimately, ABB will allow the company to maximize its return on investment and achieve its financial goals.