Budget - What is a budget?
A budget is a financial document used to project future income and expenses
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To put it simply, a budget plans future savings and spending as well as outlining projected income and expenses.
Budgeting may be carried out by individuals or by companies that wish to estimate whether they can continue to operate within the projected income and expenses. A budget can be drawn up for each financial year and contains information on the estimated value of sales and value of costs.
This data allows a company to see how the coming accounting period is likely to end. The actual performance of the business can then be measured against the information provided in this proposed plan.
Types of budget
Different budgets can be created depending on what particular aspect of a business requires focus. There are three that are the most popular:
- Forecast Budget
For a forecast budget, estimated figures are prepared. These figures can then be adjusted when the actual figures are gathered. In a forecast budget, figures from the previous year are often used as estimates for the current year. As more actual figures are factored in to the estimates, the forecast becomes more realistic and accurate.
- Performance Budget
A performance budget involves estimates made for upcoming revenue and expenses. This is done by assessing each item on the income statement and providing a percentage of expected change from the previous year.
If a smaller-sized company is involved, the budget can be based on the company as a whole. A larger company will create a budget for each department. Departmental budgets would then be combined to create a total for the company.
Performance budgets are often based on a service rate or on a specific project. As the company grows, performance budgets may be drawn up on a ‘per project’ basis.
Budgets are also usually created for anticipated projects and, as in the case of the forecast budget, these take into account an overview of expenses against anticipated revenue.
- Cash Budget
A cash budget forecasts how cash will be used throughout the coming year. It usually focuses on the near future since the goals and strategies of a company can change with circumstances. The budget predicts future expenditures and cash receipts for a specific time period.
This particular budget allows a company to gain some insight on whether income will cover expenditure and when it might be necessary to seek external funds. Find out more about cash budgets.