What is a Budget?
A budget is an estimate of revenue and expenses for a given future period of time that is usually compiled and re-evaluated regularly. Budgets can be created for an individual, a group of individuals, a business, a government, or anything else that generates and spends money.
Budgeting is essential for managing monthly expenses, preparing for life’s unexpected events, and being able to afford big-ticket items without going into debt. It simply means that you’ll know where your money is going and have more control over your finances. Check out this cancelled cheque image.
A budget is a microeconomic concept that illustrates the trade-off when one good is exchanged for another. The bottom line—or the result of this trade-off—is that a surplus budget indicates that profits are expected, and a balanced budget indicates that revenues will equal expenses. A deficit budget suggests that costs will exceed revenues.
Budgets are an essential component of efficiently and effectively running any business.
Budget Development Process
The process starts with establishing budget assumptions for the upcoming fiscal period. These assumptions are related to projected sales trends, cost trends, and the market, industry, or sector’s overall economic outlook. Specific factors influencing potential costs are addressed and tracked.
Because subsequent expense budgets cannot be established without knowing future cash flows, the sales budget is frequently the first to be developed. Budgets are created for each of an organization’s subsidiaries, divisions, and departments. A separate budget for direct materials, labour, and overhead is frequently developed for a manufacturer.
All budgets are combined into the master budget, including budgeted financial statements, cash inflow and outflow forecasts, and an overall financing plan. In a corporation, top management reviews the budget and submits it to the board of directors for approval.
Static Vs. Flexible Budgets
Budgets are classified into two types: static budgets and flexible budgets. A fixed budget does not change throughout the budget. Regardless of what happens during the budgeting period, all accounts and figures calculated initially remain the same.
A flexible budget has a monetary value concerning certain variables. A flexible budget’s dollar amounts fluctuate based on sales, production, or other external economic factors.
Budgets of both types are helpful for management. A static budget assesses the effectiveness of the initial budgeting process, whereas a flexible budget provides more insight into business operations.
Individuals and families can create budgets as well. Making and sticking to a budget isn’t just for people who need to monitor their cash flow from month to month because “money is tight.” Budgeting can benefit almost everyone, including those with large paychecks. Budgeting is an excellent tool for managing your finances, but many people believe it isn’t for them.
Sticking to a Budget
You now understand the intricacies of budgeting. You’ve completed all of the above and created a nice spreadsheet for 15 years. The only issue is that sticking to your budget isn’t easy. That credit card is still calling your name, and your “clothes” category appears to be relatively small. Budgets, you decide, are not enjoyable. To learn about your upi limit, click here.