Budget

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A budget is a spending plan - for the government, a company, a non-profit, or even an individual.

Purpose of having a budget

A budget allows you to put ideas down on paper in terms of the monetary value involved with a project. For businesses and various projects, it also provides a forecast into their financial performance going forward. This way, the actual and forecasted operations can be measured against each other.

Used properly, a budget can identify the amount of money that one would require at a certain point of time in the future. This is useful because allocation of capital eventually ends up having an impact on the direction of the project. Sometimes, realities of the budget force people to rethink plans drastically, even cull certain projects.

Kinds of Budgets

Budgets can be categorized based on their purpose:

  • A Government Budget focuses on summarizing the intended revenues and expenditures of a government for a specific fiscal year. This would include their spending on public welfare, defense, goods and services, etc and the revenue of the government, which comes primarily through taxation.
  • A Corporate Budget is compiled annually and is generally presented as the financial plan of the company. Accuracy in forecasting is a great indicator of how well the management knows the business. Correct predictions generally signify great management and control, whereas wild fluctuations between the forecast and actual budget make investors wary of the stock.
  • Personal Budgets are also called family budgets since they compare the income and expenses for families or individuals. They are subjected to budget constraints that dictate that household spending cannot exceed its assets.
  • Miscellaneous Budgets could include business start up budgets, non-profit budgets and other possible budgets for any project or an event.

Budgets can be classified by their methodology, that is used to come up with the data[1]:

  • Incremental Budgets are those in which the figures are based on real values from previous year and adjusted for the inflationary increase. No estimation is required, since it requires only extrapolation from the values of the last year.
  • Zero-based Budget starts from scratch as every detail is discussed and proposed. Informed estimates are made and no past values are used (in comparison, incremental budgets are based only on past values) This method is more detailed as each line and item gets examined, where any unjustified item would get eradicated.

Another popular way of classifying blogs is by the kinds of budgets used[2]:

  • Operating Budget plans for current costs and future financing methods. This is the most commonly used method of managing revenue and expenses.
  • Capital Budget is similar to an operating budget but details each and every expenditure, right down to purchasing needs of individuals or businesses.

References

  1. Budgeting
  2. What Kinds of Budgets are available
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