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Budget, Types of Budgets

A budget is a detailed plan of operations that is predetermined for a particular period. Budgets
are quantitative or financial statements prepared for the purpose of attaining a particular
objective.

Budgeting Process

Budgeting is the formal procedure of preparing budgets. It involves the following basic steps:

• Identifying expenses

• Determining different sources of income

• Preparing the budget

• Establishing the budget period

• Laying down the budget procedure

• Allocating income for expenses

• Monitoring the efficiency of the budget

Re-assessing the budget

National Budget

National budgets are legal documents, which are provided by legislatures before being passed
by the executive head of the nation, such as the president, prime minister or other chief official
of a nation. The budgeting process of a nation involves:

• Classifying expenses: The expenses allocated in a government budget include consumption and
investment expenditure on infrastructure development and research and development. It also
includes transfer payments, such as social security and unemployment benefits.

• Revenue determination: The primary source of revenue generation for a government budget is taxes.
• Preparing budgets: A government budget may be for a quarter, a year, five years or ten years. The
period of the budget and the procedure of revenue allocation are exclusively mentioned by the
government.

Examples of specific country budgeting processes, such as those in US, Canada, UK,
Germany, Australia, New Zealand, Japan, India and Brazil, are detailed at the end of this article.

Company Budget

A company budget is prepared by the owner and shareholders of the company. It may also be
prepared with the inputs of other stakeholders, such as employees and creditors. The budgeting
process of a company involves:
• Categorizing Expenses: Business expenses include capital expenditure on acquisition and
modification of assets and revenue expenditure on routine activities such as payment of electricity
and rent.

• Revenue calculation: Sources of business revenue include capital, borrowed funds and sale of
goods.

• Budget preparation: This is generally prepared for a financial year. The purpose of the budget is to
allocate funds for various business activities, such as production and distribution.

Personal Budget

A personal budget is prepared by individuals and families to allocate income for various
expenses, savings, investments and other financial obligations, such as debts. A personal
budget is prepared by:

• Organizing expenses: Personal expenses include expenditure on present consumption or future

savings and investments. This includes incorporation of travel and leisure expenses and savings for
the education fund of children.
• Revenue summation: An individual earns an income from a number of sources, including salary,
social security, worker’s compensation and rent collection.

• Budget preparation: This is generally prepared on a weekly or monthly basis. The idea of a personal
budget is to allocate income for various expenses, while setting aside a portion for savings.

The budgeting process of governments, companies and individuals involves re-evaluation and
revision of the budget. The budget is periodically monitored with respect to established targets
and results obtained. Shortcomings in the outcome are evaluated and necessary modifications
are made in the future budget to avoid unnecessary expenses.

Definition:

A Budget is a plan that outlines an organization's financial and operational goals.

So a budget may be thought of as an action plan; planning a budget helps a
business allocate resources, evaluate performance, and formulate plans.

While planning a budget can occur at any time, for many businesses, planning a
budget is an annual task, where the past year's budget is reviewed and budget
projections are made for the next three or even five years.

The basic process of planning a budget involves listing the business's fixed and
variable costs on a monthly basis and then deciding on an allocation of funds to
reflect the business's goals. (For more on fixed and variable costs, see Breakeven
Analysis.)

Businesses often use special types of budgets to assess specific areas of operation.
A cash flow budget, for instance, projects your business's cash inflows and
outflows over a certain period of time. It's main use is to predict your business's
ability to take in more cash than it pays out.

And if you're planning on starting a business, planning a budget plays an important

role in determining your start up and operating costs.The Financial Plan Section of
the Business Plan provides information on calculating your start up and operatiing
expenses.
Common Misspellings: Buget; budjet.

1
OVERVIEW
Brief description
This toolkit provides guidelines on how to go about developing and monitoring a budget.It
will help you with an overall organisational budget as well as with a budget for a specific
project.It includes tools for estimating costs as well as tips for ensuring that your budgets
meet the needs of your project or organisation.In the examples section we give actual
examples of budgets and how they can be monitored.
Why have a toolkit on budgeting?
Budgeting is the key to financial management.The toolkit will help you plan, develop and
use budgets effectively in your organisation. If you have a sound understanding of the
principles of budgeting, you will be well on the way to sound financial management. If you
use this toolkit in conjunction with other toolkits, as indicated, you will increase the capacity
of your organisation to manage its finances effectively.You will also increase its ability to
survive through foresight and planning.
BUDGET
An itemized forecast of an individual's or company's income and expenses expected for some
period in the future. With a budget, an individual is able to carefully look at how much money
they are taking in during a given period, and figure out the best way to divide it among a variety
of categories. When making a personal budget, an individual will typically designate the
appropriate amount of money to fixed expenses such as rent, car payments, or utility bills, and
then make an educated estimation for how much money they will spend in other categories, such
as groceries, clothing, or entertainment. By keeping track of where one's money goes, one may
be less likely to overspend, and more likely to meet their financial goals.
Financial Budget
one that embraces the impacts of the financial decisions of the firm. It is a plan including a
budgeted balance sheet , which shows the effects of planned operations and capital investments
on assets, liabilities, and equities. It also includes a cash budget , which forecasts the flow of
cash and other funds in the business. Cash budgeting (cash planning) is a critical part of
budgeting because it is essential to have the right sums of cash available at the right times.
Business start-up budget
The process of calculating the costs of starting a small business begins with a list of all necessary
purchases including tangible assets (for example, equipment, inventory) and services (for
example, remodeling, insurance), working capital, sources and collateral. The budget should
contain a narrative explaining how you decided on the amount of this reserve and a description
of the expected financial results of business activities. The assets should be valued with each and
every cost. All other expenses are like labour factory overhead all freshmen expenses are also
included into business budgeting
[edit] Corporate budget
The budget of acompany is often compiled annually, but may not be. A finished budget, usually
requiring considerable effort, is a plan for the short-term future, typically one year (seeBudget
Year). While traditionally the Finance department compiles the company's budget, modern
software allows hundreds or even thousands of people in various departments (operations,
human resources, IT etc) to list their expected revenues and expenses in the final budget.
If the actual figures delivered through the budget period come close to the budget, this suggeststhat the
managers understand their business and have been successfully driving it in the intendeddirection. On the
other hand, if the figures diverge wildly from the budget, this sends an 'out ofcontrol' signal, and the share
price could suffer as a result

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 BUDGET

An itemized forecast of an individual's or company's income and expenses expected

for some
period in the future. With a budget, an individual is able to carefully look at how
much money
they are taking in during a given period, and figure out the best way to divide it
among a variety
of categories. When making a personal budget, an individual will typically designate
the
appropriate amount of money to fixed expenses such as rent, car payments, or
utility bills, and
then make an educated estimation for how much money they will spend in other
categories, such
as groceries, clothing, or entertainment. By keeping track of where one's money
goes, one may
be less likely to overspend, and more likely to meet their financial goals.
Financial Budget

one that embraces the impacts of the financial decisions of the firm. It is a plan
including a
budgeted balance sheet , which shows the effects of planned operations and capital
investments

on assets, liabilities, and equities. It also includes a cash budget , which forecasts
the flow of
cash and other funds in the business. Cash budgeting (cash planning) is a critical
part of
budgeting because it is essential to have the right sums of cash available at the
right times.
Business start-up budget

The process of calculating the costs of starting a small business begins with a list of
all necessary

purchases including tangible assets (for example, equipment, inventory) and

services (for

example, remodeling, insurance), working capital, sources and collateral. The

budget should

contain a narrative explaining how you decided on the amount of this reserve and a
description
of the expected financial results of business activities. The assets should be valued
with each and
every cost. All other expenses are like labour factory overhead all freshmen
expenses are also
included into business budgeting

[edit] Corporate budget

The budget of acompany is often compiled annually, but may not be. A finished
budget, usually

requiring considerable effort, is a plan for the short-term future, typically one year
(seeBudget

Year). While traditionally the Finance department compiles the company's budget,
modern

software allows hundreds or even thousands of people in various departments

(operations,

human resources, IT etc) to list their expected revenues and expenses in the final
budget.

If the actual figures delivered through the budget period come close to the budget,
this suggeststhat the managers understand their business and have been
successfully driving it in the intendeddirection. On the other hand, if the figures
diverge wildly from the budget, this sends an 'out ofcontrol' signal, and the share
price could suffer as a result.
 [edit] Event management budget

A budget is a fundamental tool for an event director to predict with reasonable

accuracy whether

the event will result in a profit, a loss or will break-even. A budget can also be used
as ap r icin g

tool.

There are two basic approaches or philosophies when it comes to budgeting. One
approach

focuses on mathematical models, and the other on people.

The first school of thought believes that financial models, if properly constructed,
can be used topredict the future. The focus is on variables, inputs and outputs,
drivers and the like. Investmentsof time and money are devoted to perfecting these
models, which are typically held in some typeof financial spreadsheet application.
The other school of thought holds that it¶s not about models, it¶s about people. No
matter how
sophisticated models can get, the best information comes from the people in the
business. The
focus is therefore in engaging the managers in the business more fully in the
budget process, and
building accountability for the results. The companies that adhere to this approach
have their
managers develop their own budgets. While many companies would say that they
do both, in
reality the investment of time and money falls squarely in one approach or the
other.
[edit] Government budget

For more details on this topic, see Government budget.

The budget of agovernment is a summary or plan of the intended revenues and

expenditures of

that government.

[edit] United States

The United States federal budget is prepared by the Office of Management and
Budget, andsubmitted to Congress for consideration. Invariably, Congress makes
many and substantialchanges. Nearly all American states are required to
have balanced budgets, but the federalgovernment is allowed to run deficits.
[edit] United Kingdom

The UK Budget is prepared by the Treasury under the direction of the Chancellor of
the

Exchequer. Parliament rarely makes any significant amendments.

[edit] India

The Budget of India is prepared by the Budget division of Department of Economic

Affairs of
the Ministry of Finance annually (Excluding the railway budget). This includes
supplementary
excess grants and when a proclamation by the President as to failure of
Constitutional machinery
 is in operation in relation to a State or a Union Territory, preparation of the Budget
of such State

or Union Territory.

[edit] Personal or family budget

For more details on this topic, see Personal budget.

In a personal or family budget all sources ofincome (inflows) are identified

and expenses

(outflows) are planned with the intent of matching outflows to inflows (making ends
meet.) In

consumer theory, the equation restricting an individual or household to spend no

more than its

total resources is often called the budget constraint.

[edit] Budget types

Sales budget: The sales budget is an estimate of future sales, often broken down
into both units

and dollars. It is used to create company sales goals.

Production budget: Product oriented companies create a production

budget which estimates the

number of units that must be manufactured to meet the sales goals. The production
budget also
estimates the various costs involved with manufacturing those units, including labor
and
material.
Cash Flow/Cash budget: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. Thecash flow budget helps the business determine when income will be
sufficient to cover expensesand when the company will need to seek outside
financing.
Marketing budget: The marketing budget is an estimate of the funds needed for
promotion,

advertising, and public relations in order to market the product or service.

Project budget: The project budget is a prediction of the costs associated with a
particular

company project. These costs include labor, materials, and other related expenses.
The project

budget is often broken down into specific tasks, with task budgets assigned to each.

Revenue budget: The Revenue Budget consists of revenue receipts of

government and the

expenditure met from these revenues. Tax revenues are made up of taxes and
other duties that

the government levies.

Expenditure budget: A budget type which include of spending data items.

The Importance of a Budget

It is not uncommon for people to ignore the need for a budget in their lives. Not
many people

think that a budget has anything to do with fixing your credit score, but it most
certainly does. A

budget can really help you calm things down, and helps put a lot of things into
perspective. Thefollowing is a quick way you can make a solid budget, and make it
work for you in order to fixbad credit score.
Making a Budget

The good thing about most bills is that they are generally the same each month. This
may not be
true for electric, gas, water, etc, but you can have a good idea of what it will be. What
you need
to do is grab a piece of paper and write down how much income you will be taking in
for the
month. This amount needs to be after taxes, and is your starting point. When you
have the
amount you will make for the month you must subtract every bill that you will have to
pay. Do
not forget about any bills. When you subtract the bills you will then have a final
amount. This is
the amount you will have after your bills for everything else including gas, food, etc. If
you want
to make a more advanced budget then you can also budget in the average amount
you spend on
food and gas a month. You must start out with a budget though, and it does not have
to be
advanced. You just need to have an idea of how much money you are making and
where it all
has to go.
Why Make a Budget?

You may know all the bills you have, and you might even pay them on time. That is a
very good
thing, and you need to keep doing it. You might even think that you do not need to
make a
budget because of this reason. A budget helps you unlock your finances though.
When you see
how much money you have after bills then you can figure out how your money will
work best or
you. You might be able to pay off more of your debts one month, or you might be
able to start a
college fund for your kids. In order to fix bad credit score you must know how your
money
works each month and you must maximize it. You may be doing well with your
finances right
now, and making a budget will only help you out.
A budget can help in so many ways. You do not even have to take a lot of time on it.
You just
need to know how much you make and where you money must go. When you have
a better idea
of this you will be able to make your money truly work for you. In the end, that is a
very
important thing.
BENEFITS

Here are some common benefits of having a budget.

y
 You become aware of your income and spending habits.

you will learn where your money come from and where they go to.

Budget
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Types Of Budget

• Sales Budget
• Production Budget
• Purchase Budget
• Expenditure Budgets
• Cash Budget
• Master Budget
• Zero Base Budget
• Flexible Budget
Sales Budget

Sales budget is a functional budget. The product wise as well as regional break
up of sales estimates are incorporated in the sales budget. The sales budget
begins with the previous year actual and incorporates the likely changes
Production Budget

The production budget is prepared based on the sales estimate incorporated inthe
sales budget. The adjustments with respect to the opening and closing
stockpositions that are policy decisions of the business are then made to prepare
theproduction budget.
Management Science-II Prof. R.Madumathi

Indian Institute of Technology Madras

Purchase Budget

The purchase budget is another functional budget that estimates the

purchase requirement of materials utilized in the production process. The
purchase budget is based on the production budget and the standard material
consumption requirement for the production estimates.
Management Science-II Prof. R.Madumathi

Expenditure Budgets

Expenditure budgets may be drafted as fixed / flexible budgets. A fixed budget is

one which is prepared keeping in mind one level of activity. It is defined as one
which is designed to remain unchanged irrespective of the level of activity
attained.
In contrast, flexible budget is one which is designed to change in relation
 Management Science-II Prof. R.Madumathi

Indian Institute of Technology Madras

to the level of activity attained. Flexible budgets are prepared where the nature

of business is such that it is difficult to predict the demand/sale of goods.

Cash Budget

A cash budget consolidates all the cash inflows and outflows for the business.
The cash budget is also a functional budget. The cash budget helps the business
to plan the project purchases as well as to provide for the loan requirements. The
cash budgets also help in defining the repayment plans for short and long term
loans of the business.
Management Science-II Prof. R.Madumathi

Indian Institute of Technology Madras

The cash budget is based upon the business policy of holding a certain amountas
cash. This is the desired opening cash balance for the business. Accordingly,the
cash budget forecasts the loan requirements or short term investments thatare to
be made with excess cash at any specific time.
Master Budget

The overall or master budget summarizes the other functional budgets.

Consolidating the functional budgets, an
income and expenditure budget and budgeted balance sheet are prepared. The
master budget is usually a one-year budget expressing the expected asset
position and capital and liability positions for the projected year.
Management Science-II Prof. R.Madumathi

Indian Institute of Technology Madras

Master Budget – Income Statement

Particulars January February March Total

Sales 12000 15000 10000 37000

Less: cost of goods sold 5000 7000 4300 16300
Factory overheads 2000 2000 2000 6000
Administrative overheads 1000 1000 1000 3000
Selling overheads 500 600 400 1500
Net profit 3500 4400 2300 10200

Indian Institute of Technology Madras

Zero Base Budget

An illustration of a long term budget is the Zero base budget. Zero Base
Budgeting process looks at requirements/ plans anew each year irrespective of
project continuity. These are necessarily long term project budgets.
Types of Budget
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04 / 22 / 2010
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