What is a Budget?

Definition:

A budget is generally a list of all planned expenses and revenues. It is a plan for saving and spending for the near future.

The purpose of a budget, generally speaking, is to:

a) provide a forecast of revenues and expenditures, and
b) enable the actual financial operation of the business to be measured against the forecast.

If a detailed budget is created, it makes it easier to follow up on what had gone as expected and what hadn’t.

Performance Budget

It implies that one makes an assessment of expected income and expenses. Budgets are typically based on its results for the corresponding period a year earlier (small firms). Many companies base their budget on the outcome from the same period a year earlier. Each item is assessed as a percentage of expected change.

Budgets are based on a specific project, utilization rate and number of employees (service). The bigger the company gets, the harder it will be by simple means to create an overview of all events affecting the year. Many service providers therefore choose to budget specific projects that are currently in the company.

In addition, a budget may be created of anticipated projects. With an overview of the various projects, budgets will then portray a picture of the expected revenue. Costs are usually calculated on the basis of the previous year's results because costs are easier to predict in this way.

Budgets may also be based on the sum of each department within the company (little larger firms). One can also base its budget on the various departments of the company. Often both income and expenses are taking into account in each budget before creating an overview of its total budget.

Forecast

Forecast is usually recognized as an adjusted budget. Estimates are prepared for some time within the year, when a part of the outcome is known. Preparing a forecast includes adding the results from another period, and reporting those in the budget for the remainder of the year.

That way you get a more realistic picture of the outcome for the full year. Often you will additionally adjust the budget in terms of already known budgetary deviations. This is called an adjusted forecast.

Cash Flow Budget

Equally important as an outcome budget is a cash budget. A cash budget covers a forecast for how the cash is included in the company.

The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.