Definition: A budget is a financial document used to project future income and expenses.
To put it simply, a budget plans future saving and spending as well as planned income and expenses. Budgeting may be carried out by individuals or by companies to estimate whether or not they can continue to operate with its projected income and expenses.
A budget can be drawn up for each financial year and contain information on the estimated value of sales and value of costs. From this you can see how the coming accounting period is likely to end. The actual performance of the business can be measured against this proposed plan.
Different budgets can be created depending on what particular aspect of the business requires focus. See three popular kinds of budgeting plans below.
Preparing a budget can help you plan for future income and expenditures
Forecast Budget
A forecast budget is where estimated figures are prepared which can then be adjusted when actual figures come in.
In a forecast budget, figures from the previous year are often used as estimates for the current year. As more current figures are factored in, the forecast becomes more realistic.
Performance Budget
Performance Budget is where estimates are made on upcoming revenues and expenses. This is done by assessing each item on the income statement and giving it a percentage of expected change from the previous year.
Budgets can be based on the company as a whole if small, or by department if larger. Departmental budgets would then be combined to create a complete overview.
Performance budgets are often based on a service rate or on a specific project. As the company grows, performance budgets may be drawn up per project. Budgets are usually also created for anticipated projects and, as in the case of the forecast budget take into account an overview of expenses against anticipated revenue.
Cash Budget
A cash budget forecasts how cash will be used throughout the year. It is equal in importance to a results-based budget and 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 the company to gain some insight about when income will cover expenditure and when it might be necessary to seek external funds. Find out more about cash budgets.
