Definition: A budget is an estimated amount for expense and revenue during a specified tenure. Government, businesses, or individuals use budgets to maintain their financial position. Once the budget is estimated, it is evaluated and re-estimated regularly.
One way to think of a budget is an organization’s financial strategy for continuing to function, maintaining operations, and controlling costs.
Types of Budgets
A budget can be of two types:
- Corporate Budget
- Individual Budget
Corporate Budgets
Because of the need to comply with regulations and because it helps them better manage their finances, every company has a budget that details its cash inflow and outflow. It makes it easier for them to keep their spending under control and plan for future expenditures.
The typical time spent planning an organization’s budget is between three and five years in advance.
Individual Budget
This is also known as a personal budget. Most people either have employment that provides a salary or have fixed incomes; consequently, they budget their spending according to the amount of money they bring in. By using a budget, individuals can ensure that their spending does not go above and beyond what they bring in, and they can also set aside money for savings.
Individuals can better track their immediate and long-term costs and prepare for unexpected events using budgets.
A budget can be:
- Surplus Budget: Here, the revenues are more than the expense.
- Balanced Budget: Here, revenues and expenses are equal.
- Deficit Budget: Here, revenues are fewer than expenses.
How is the Budget Developed?
The budget is responsible for managing both the earnings and the expenses.
The final revenues are calculated by adding the businesses’ revenue estimates from each stream. After that, they arrange their spending according to the revenue they expect to get. The expense takes into account both operational expenditures as well as capital expenditures.
While developing expenditure, businesses ensure that it does not cross the revenues. If they do, the budget would be short, and they may require more financial support to cover the additional costs.
When the budget is finished being drafted, it is distributed to all of the departments and sections. After that, it is investigated using the centralized monitoring system.
Status Budget Vs. Flexible Budget
A static budget is one in which the budget value allotted to each expense does not fluctuate throughout the period covered by the budget. A flexible budget allows the value to be updated and changed whenever necessary to reflect the current scenario.
A static budget provides effectiveness in the budgeting process, while a flexible budget provides insight into business operations.
What is the Purpose of the Budget?
The purpose of the budgeting process is to give control of financials. Businesses will know their income stream and can easily plan expenses and develop plans.
A budget is adaptable and can be modified according to the needs and circumstances of the organization.
It is a regulatory necessity in many different scenarios. For instance, a public sector corporation has an obligation to provide its shareholders with quarterly financial reports.
Importance of Budget
A budget is nothing but a financial plan, and it helps a lot. The followings are the importance of budgeting:
- Relive Stress: It helps businesses relieve stress. They will know their income and expenses, and there is no need for them to worry about costs in the current and the next years. It prepares them to deal with challenges and make tough decisions.
- Helps Avoid Debt Trap: In the absence of budgeting, an organization can fall into a debt trap without realizing it. Getting out of this maze is difficult and costly. With robust budgeting, organizations can avoid the debt trap and, in fact, pay off their debts.
- Future Growth: Budgeting helps organizations save money, invest in future ventures, and grow the organization.
Summary
A budget is an excellent instrument for managing the financial affairs of any entity, including the government, organizations, and individual people. When businesses have a budget, they will know their income, which will allow them to plan their expenses and establish strategies for expanding their business.