What is a Budget?
A budget is a plan to:
- Ensure you have enough money for activities in the future.
- To control and monitor all the finances of the business, including its income and expenses.
- To enable information to be extracted so the business can make decisions as to direction and growth.
The budget enables the owner of the business to rely on accurate figures that would otherwise have been based around guesswork alone. At any time, the owner should not confuse a budget with a forecast. A forecast is a prediction of the future, whereas a budget is a planned outcome of the future that the business wants to achieve.
What is Business Budgeting?
Most of us do not really think much about it, but we are preparing a budget every time we estimate how much cash we are going to need for a particular purchase and how much money we will have left over at the end of the month after paying our bills. A budget is simply an estimate of what is going to happen in the future as far as our income and our expenditure is concerned.
Business Budgeting is a term often used to mean forward planning in a business. It has, of course, a wider meaning than planning because it also includes coordinating, managing and controlling. In simple language, a business budget is the financial plan of a future period in your business and represents a suggested way or plan of achieving a particular result. It is a means of expressing the goals of your business in financial and monetary terms.
Why Create a Budget?
A budget enhances the chance of success of your business because it estimates your future requirements and predicts a profit position, as well as outlines what your spending should be and how your cash flow should run. The budget is designed to highlight potential problems before they occur, so that you have time to make changes to prevent those problems either getting worse or occurring at all.
Many small business owners run their business totally without setting any budgets because they feel they can make profits even if they don’t budget. The fact, however, is that even if the small business is profitable, there is always the possibility that if they used budgets and ran the business closer to the plan of those budgets, their profitability could increase far more than what was achieved without the budgets.
Business Budget is a Financial Business Plan
The process of creating a budget should be simple if there are appropriate systems in place to extract accurate information. A budget is organised in the same way and format as a financial statement such as a revenue statement, or profit and loss, and usually covers a one year or 12 month period. At the end of that year, the estimated results of income and expenses as put down in the budget are compared to the actual performance of the business, as recorded in the financial statements. Budgeting, therefore, expresses the business plans of a business in financial language.
Types of Budgets
The whole budgeting process involves realistic forecasting, monitoring and planning. It requires estimates to be calculated, based on future events, taking into account the information available at the time.
There are many different types of budget.
These include the following budgets:
- A sales or revenue budget.
- A purchases budget.
- A stock or inventory budget.
- An expenses budget.
- A profit budget.
- A cash budget.
- Break-even budget.
- Capital funds budget.