A budget is a projection of revenue and expenses for a certain future period that is usually prepared and reviewed on a regular basis. It is a statistical plan or forecast for a company’s future in which the company allocates resources to various activities or departments. Budgets can be created for an individual, a group of individuals, a government, a company, or almost anything else that generates and spends money. A budget is essentially a business plan for the future.
Additionally, budgets are used by businesses to monitor and oversee their actual performance against the planned budget. Managers and board members get together to talk on where they want the company to go in the future, what markets they want to get into, and what products they want to develop. To achieve any of these long-term goals, the organization needs a system in place to create opportunities and track progress. That is precisely what a budget accomplishes.
Budgets are frequently set before the start of a calendar or fiscal year, with room for revision as revenues rise or fall. One cannot overestimate the importance of a budget in the corporate sector. Budgets or plans are critical instruments for Management Control at every step of planning, decision-making, and coordination.
The process of establishing budgets and practicing budgetary control is known as budgeting. A company needs a fully descriptive roadmap of the business plan that provides metrics and indicators of performance to meet its goals in their strategic plan.
Types of Budgeting Models:
- Zero-Base Budgeting
A zero-base budget includes establishing management’s desired goals and generating a set of expenditures to support each one. This strategy is especially beneficial in service-based organizations, such as governments, where quality service is a top priority. However, this may be a time-consuming procedure. Also, because of new adjustments every year, departments are always unsure of the funding that will be allocated to them.
- The Rolling Budget
A rolling budget involves the addition of a new budget period as soon as the previous one is finished. As a result, the budget always extends a consistent amount of time into the future. However, every accounting period, a significant amount of budgeting work is required to design the following incremental update.
- Flexible Budgeting
A flexible budget model allows the user to enter various sales levels into the model, which will subsequently change anticipated spending levels to meet the sales levels. This method is beneficial when estimating sales levels is challenging and a substantial share of expenses varies with sales. This model is more difficult to create than a static budget model, but it produces better results.
- Static Budgeting
This is the traditional method of budgeting, in which a company produces a model of its projected results and financial position for the coming year, and then tries to compel actual results to match the budget model as nearly as possible over that time period. This budget style is usually focused on a single projected result, which can be tough to accomplish. Actual earnings will vary greatly due to the lack of a flexible approach, as predicted expense levels do not change with the number of sales.
- Incremental Budgeting
Because it assumes that what has occurred in the past can be carried forward into the future, incremental budgeting is a simple way to update a budget model. This strategy produces simplified budget updates, but it does not prompt a deep evaluation of corporate efficiency and expenditures, and hence does not contribute to the development of a smooth operational organization.
Budgeting motivates managers to think ahead; it aids in the coordination of various functions and departments within the company; it represents individual managers’ duties; it provides a framework for assigning tasks, and it provides incentives by establishing performance standards.
Moreover, budgeting is essential for managing monthly spending, preparing for life’s unanticipated circumstances, and being able to afford great things without falling into debt. Keeping track of your income and expenses doesn’t have to be a headache; it doesn’t require you to be a math genius, and it doesn’t mean you can’t buy the items you want. It simply means that you will be aware of where your money is spent and that you will have greater control over it.