The term budget refers to an estimation of expenses and revenue over a specified future time period. A budget is compiled and re-evaluated on a periodic basis. It is possible to make budgets for a person, a business, a group of people, a family, a government, a country, or a multinational organization. Budgets can also be made for any activity involving making and spending money. At organizations and companies, a budget can be said to be an internal tool that is used by the management and is not often required for purposes of reporting by external parties.
A budget can also be said to be a microeconomic concept showing the trade-off that is made when one good is exchanged for another. Depending on the end result of the trade-off or the bottom line, a surplus budget means that profits are anticipated, a deficit budget means that expenses will exceed the revenues and a balanced budget means that revenues are expected to be equal to the expenses.
Some of the key points to note with regard to budgeting include:
Budgets are an integral part of running any business in an effective and efficient manner.
This process starts by establishing assumptions for the upcoming period of the budget. There exists a relationship between these assumptions and the projected sales trends, the overall market’s economic outlook, and the cost trends. Specific factors that affect potential expenses are addressed and monitored. The publication of the budget is done on a packet outlining the procedures and standards that are used in developing it. These include the key relationships with vendors providing discounts, assumptions about the markets, and explanations of how specific calculations were made.
The sales budget is mostly the first one to be developed, as subsequent expense budgets can’t be established without the knowledge of future cash flows. The development of budgets is done for all the different departments in an organization, different subsidiaries, and divisions. For the case of a manufacturer, a separate budget is developed for labor, direct materials, and overhead.
All the budgets get rolled up into what is referred to as the master budget, which also includes the budgeted financial statements, an overall financing plan, and forecasts of cash outflows and inflows. At a corporation, the budget is reviewed by the top management and submitted to the board of directors for approval.
Budgets are of two major types: flexible budgets and static budgets. A static budget is that which remains unchanged of the budget’s life while a flexible budget is that which has a relational value to specific variables.
In the static budget, all figures and accounts that were originally calculated remain the same regardless of the changes occurring during the period of budgeting. In the flexible budgets, the amounts that are listed change on the basis of the level of sales, the levels of production, and other external economic factors.
A personal budget can also be another type of budget. These are budgets for families or individuals. Generally, budgeting is a great tool for managing your finances.
