What is a budget? A budget is a forecast of revenue, expenditure and profit. Most budgets are revised annually.

A budget (from old French bougette, purse) is a financial document used to project future income and expenses. The budgeting process may be carried out by individuals or by companies to estimate whether the person/company can continue to operate with its projected income and expenses. There you are, running around in small circles with deadlines to meet and bills to pay. Can you really afford the time required to produce a detailed budget? Isn't your time better spent generating revenue? Yes and no. To paraphrase Alice and the Cheshire cat: "If you don't know where you are going, you are sure to get somewhere if you only walk long enough". The budget provides you and your investors with a numerical map that leads somewhere specific. What does it achieve? There are two (often overlapping) reasons for producing a budget. One is to persuade potential investors that your company is a good bet. The other one is to plan your business finances - how much money do you have and how do you plan to use it? How much revenue do you need to generate to achieve your target profit? Is your business plan viable or does it need adjusting? In retrospect, did the year pan out the way you planned, or did something go wrong? How to approach a budget First, find out how your accounting software deals with budgets. It's far more efficient to use the same package for accounting and budgeting. Next, meet your accountant to plan how to structure the budget. Arrive prepared, with a chart of accounts and a list of informed questions. Take copious notes. Traditional budgets are very difficult for start-ups and firms with a short history, because there is little or no historic data. Revenue is particularly problematic, because no matter how carefully you have planned, it's impossible to predict the future. There are two main approaches to budgeting:

The projections approach Here you enter projected costs and projected revenue, and calculate projected profits from these. This is reasonable and rational if the company has several years of relatively stable history to project from. If it's a new company, such a budget is likely to become an exercise in denial and wishful thinking. The required profits approach An alternative method is to enter projected expenses, and then calculate how much profit you require, and how much you think you can actually generate. Eventually this should be enough to pay your salary and provide a return on your investment in the company. However, it might be realistic to plan for a loss in the first year or two, and only a small profit for a year or two thereafter. Having settled on a number, you now add expenses to profit to come up with your required revenue. Turn this number inside-out. Is it realistic? Is it achievable? Instead of guessing wildly how many widgets you may be able to sell, or how many hours you hope to bill, you can now soberly assess whether you will be able to reach your targets. Don't have 10,000 billable hours in the year? Can't afford enough machinery to make a million widgets? Go back and adjust the business plan. Once the company is liquid, determine your salary based on what you would be earning if employed in a similar job, and your return on investment based on the interest you would receive if investing outside the business.

EXPENSES Fixed costs Fixed expenses remain the same regardless of sales volume. They include rent, loan repayments, and insurance. Semi-variable costs These are costs with fixed and variable components, such as telephone, salaries and wages. The fixed component is the minimum cost of supplying goods or services, while the variable component changes depending on sales volumes. Variable costs Variable costs increase or decrease in line with sales, and include costs of materials, distribution and commissions. Start-up costs Initial costs must be factored in for a start-up. REVENUE If you use the required profits method outlined above, you will have generated a total figure for required revenue. This is a goal rather than a prediction. You need to break it down to decide how many of what you need to sell, what you need to charge, and whether the targets are realistic. It has the added advantage of generating very clear monthly sales targets. Once the business has been running for some years, revenue will be predicted in a more conventional way, based on past performance. MONITORING THE BUDGET Once you have set up the budget, compare it to the actual figures every month, to look for differences and establish why they are there. Adjust expenditure or sales efforts as you go along, to bring the next group of numbers in line with the budget.

Budget types

Sales budget an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals. Production budget an estimate of 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. Created by product oriented companies.

Cash flow/cash budget 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.

Marketing budget an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service. Project budget 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 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 includes spending data items

Government budget The budget of a government is a summary or plan of the intended revenues and expenditures of that government. United States federal budget The federal budget is prepared by the Office of Management and Budget, and submitted to Congress for consideration. Invariably, Congress makes many and substantial changes. Nearly all American states are required to have balanced budgets, but the federal government is allowed to run deficits.

United Kingdom budget The budget is prepared by the Treasury under the direction of the Chancellor of the Exchequer. Parliament rarely makes any significant amendments. Union budget of India The budget is prepared by the Budget Division of Department of Economic Affairs of the Ministry of Finance annually. 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. The railway budget is presented separately.

ESTIMATED CURRENT BUDGET 2012-2013 Of the many numbers that Finance Minister Pranab Mukherjee will read out in Budget 2012, these 10 matter the most. 1) Fiscal Deficit What is it? The difference between all expenditure and receipts (including non-tax ones like disinvestment). This deficit is bridged by market borrowings. So, a higher deficit would push private borrowings away from the market and keep interest rates high. Why it matters ? It has gone out of hand, and the government is mostly meeting it through market borrowings. In July 2009, the UPA-II government had declared it would pare its fiscal deficit to 3% of GDP by March 2012. It was pegged at 6.4% in 2009-10. However, economists say the fiscal deficit will rise by at least 1 percentage point over the budgeted 4.6% in the current fiscal. In rupee terms, the government will overspend by nearly Rs 90,000 crore. A key challenge for finance minister Pranab Mukherjee would be to lay a realistic road map to reduce fiscal deficit.

2) Revenue Deficit What is it? It shows the government's current expenditure not covered by its tax collections. Current expenditure does not include interest payments on debt and capital spending. Ideally, this number should be zero or negative as a revenue deficit means borrowing to meet today's needs. Why it matters ? It has soared nearly 6-fold in the last four years and is set to cross Rs 3,50,000 cr this fiscal. As per the Fiscal Responsibility and Budget Management Act, the Centre had to eliminate the revenue deficit by March 2010. That plan has gone haywire, first because of the fiscal stimulus in 2008-09, and then due to farmer loan writeoffs, social spending and subsidies. With additional social spending planned, and indecision on fuel and fertiliser subsidies, how will it be reduced?

3) Market Borrowings What is it? How much the government is borrowing from the public, indirectly. It's indirect as scheduled commercial banks have to hold 24% of their deposits in government securities. Why it matters?

In India, only the public is net saver. Both the government and the corporate sector rely on public saving, which averages 22% of GDP. But Indians tend to park half their savings in physical assets like gold. Thus, savings amounting to about 11% of GDP are available to the government and the corporate sector. Trouble is, if a government is borrowing excessively, it crowds out the corporates, which then have less money to invest, and create assets and jobs.

4) Implied GDP Growth Rate What is it? The rate at which the economy is projected to grow, and the expected rate of inflation. From this flow the estimates of tax collections. Why it matters? Last Budget, the government assumed a nominal GDP growth rate of 14% for 2011-12, as the economy showed resilience in the aftermath of the 2008 crisis. With the assumption that inflation would be tamed at 5%, the real GDP growth rate was pegged at 9% (14-5). Now, however, nominal GDP is expected to be less, as the economy has slowed, and inflation likely to be higher. The finance ministry expects real GDP growth rate to slow down to 7.25-7.75% in the current fiscal, says a recent document released by the central bank.

5) Tax Collections What is it? By how much the government expects its tax collection to grow from various avenues. Gives a snapshot of growth expectations Why it matters? Last Budget, the government projected a much lower growth rate in excise and customs duties. This means the government expected growth in manufacturing to slow. But for the services sector, the target for growth in tax collection was kept at previous year levels.

6) Revenues Foregone What is it? Notional amount of revenues given up by government because of fiscal sops. If the government looks to raise taxes, it will look here. Why it matters? One argument made by the proponents of the job guarantee and food security laws is the largescale tax exemption given to companies. If you can give to companies, why not to the poor, they argue. According to a calculation done by the finance ministry, the total amount of revenue foregone was 72% (or Rs 5,11,630 crore) of tax collected. This is enough to wipe out the fiscal deficit and still have money to pay back past debts. The government intends to phase out many exemptions, like the area-based exemption for investment made in specific areas for excise duty relief. Under Customs duty, low or nil tariff on crude oil and edible oils contributed the most. In order to bridge the fiscal deficit, it has to minimise the number of exemptions to increase tax revenues.

7) Tax Arrears What is it? The amount of tax payments pending, including those under dispute. It's a good indicator of how efficient the tax authorities are in collection of taxes and in disposing of appeals. Why it matters? Reducing tax arrears helps cut the fiscal deficit. If in a particular year, taxmen aggressively pursued cases, there will be a spurt in appeals in subsequent years. Income-tax arrears accounted for 54% of the direct tax collection for 2009-10, according to a report by the CAG office. The report further said: -- Individuals and Hindu Undivided Family accounted for 60% of total arrears -- Of this, 12 individuals accounted for 90% of the arrears -- Income Tax dept classified Rs 1,65,337 crore of tax arrears as 'unrecoverable'

8) Social Sector Spending What is it? The amount spent by the government on social schemes. While the government wants to spend more, some argue it is throwing good money after bad. Why it matters ? There are 13 flagship schemes, including employment (NREGS), health ( National Rural Health Mission) and education (Sarva Shiksha Abhiyan). Most are centrally sponsored while the states implement them. Under eight years of UPA, spending on social schemes has increased 4.6 times. In 2011-12, it is projected to account for 18% of the Centre's total spending. With the Food Security Bill planned next fiscal, this amount could increase further. A committee has been formed to suggest ways to reduce the number of schemes

9) Capital Expenditure What is it? The government spending going into creation of assets. Similar to an individual saving today to secure tomorrow, this entails creation of assets, for example, a primary school or primary healthcare centre, that will yield benefits not just for one year, but for many years.

Why it matters ? India fares poorly in spending for the future. Just 12 paise of every rupee spent goes towards creation of capital assets. By comparison, 18 paise goes towards interest payment. Yet another parameter to judge the quality of fiscal deficit is to measure the ratio of capital expenditure to fiscal deficit. This ratio is around 40%, and it means that 40 paise of Re 1 borrowed today is spent towards creating capital assets. The rest is to meet today's expenditure. Can the finance minister increase capital spending?

10) Resources Transferred To States & Local Bodies What is it? The percentage of Centre's funds transferred to the states. Thanks to successive finance commissions recommending higher share in taxes collected by Centre, the states' claim on central resources rose by 50% in the last three years. Another reason is the spurt in socialsector schemes sponsored by the Centre and implemented by the states. Why it matters ? The Thirteenth Finance Commission has recommended the states' share be fixed at 32% of the sharable central taxes. However, a key part is the money transferred to create capital assets or plan expenditure, like building a school or a hospital. This number grew only by 25% in the last three years to Rs 1,06,026 crore, pointing to more money being spent on non-plan expenditure.

ARTICLE FROM ECONOMIC TIMES Finance minister Pranab Mukherjee is obviously a worried man as he gets ready to present the Union Budget on March 16. He has admitted to losing sleep over the mounting burden of subsidies. That is not his only worry. The Indian economy has faced a number of problems in the current year. The foremost is its slowing pace of growth. This weeks quick estimate of 6.9 per cent growth in the current year confirmed most analysts poor prognosis based on many grim performance indicators that came out in the second half of 2011. This is the slowest growth in three years. Some indicators of the less-than-satisfactory state of the economy are persistent inflation, stopand-go pace of industrial production, a steep fall in the value of the rupee, all leading to investor anxieties and some loss of credibility in Indian economic management. A few small improvements reported in January 2012 have now become inconsequential with the confirmation of the slowdown. The finance ministers foremost concern is the one he shares with the aam aadmi: making ends meet. The budgetary deficit target for 2010-11 was met easily because of the windfall gains from 3G spectrum auction. Buoyed by this achievement, the Budget for 2011-12 lowered the target a bit, to 4.6 per cent of the gross domestic product (GDP). That this will not be met is merely stating the obvious; the economic mandarins must be trying every known trick to keep the deficit target within reasonable limits. Last years Budget had forecast tax revenues on the basis of the anticipated 8.6 per cent growth of the GDP, while pegging the increase of expenditure at a very modest 3.4 per cent. The economic slowdown has led to a lowering of revenue growth, while high inflation has made a mockery of the expenditure target. Mounting fuel subsidies, now estimated to be at least `50,000 crore higher than budgeted, have swollen the already high burden of subsidies. The deficit genie is now well and truly out of the bottle and likely to be close to six per cent of the GDP, notwithstanding all the recent statistical skullduggery. In theory, this need not have happened. With signs of the slowdown becoming increasingly clear, the government could have readjusted its spending priorities in line with current expectations and even explored possibilities of raising additional revenues. It could have linked all domestic fuel

prices (and not just that of petrol) to the landed rupee costs of imported oil and gas, which have risen steadily due to higher international oil prices and falling rupee. But that would have required managing recalcitrant allies. Political skills required to accomplish this are of a far higher order than those displayed by the Congress in UPA-2. The much talked about paralysis at the top has affected not just reform and growth policies but prudent housekeeping as well. The budgetary deficit is not the only one that hurts. The commerce ministry feels that even if exports continue at the December level of $25 billion a month for the rest of the year, imports will exceed exports by around $155-160 billion. This level of trade deficit is too high and is bound to affect the balance of payments adversely after factoring in remittances and net investments. The pressure on the rupee would continue. The current fall in inflation is almost wholly because of a larger-than-expected seasonal drop in the price of vegetables in November-December 2011, which will most likely be corrected, as noted in the Reserve Banks review of the economy in the third quarter of the current financial year. Mr Mukherjees hope of ending the year with seven per cent inflation hangs in the balance of mandis, because manufactured articles and energy prices show no signs of abating. The net effect is that budget-making will be a tightrope walk, balancing various pressures and allowing no more than cosmetic changes. The Congress banks on a wish-list scenario of a change in the coalition calculus post the Uttar Pradesh elections, with the Samajwadi Party in the UPA fold to counter the veto power of the Trinamul Congress. Even if this happens, the new allies would have their own populist compulsions which would add to, rather than detract from, the difficulties of hard and pragmatic economic decision-making. Mr Mukherjees degrees of freedom to mobilise additional resources will thus be as constrained as they are now, while the demands on what he manages to collect will undoubtedly increase. The proposed Food Security Bill will push the food subsidy to `1 lakh crore or higher. Every state and Central government department will continue to press for additional budgetary support. The government cannot keep printing money without adding to the inflationary spiral, nor can it easily hive off public sector assets to generate revenues, because that would most likely run afoul of some political formation within or outside the government.

The unfortunate consequence of the highly fractured Indian polity is the prevalence of the permanent election mode, not only because some major state or the other is going to the polls but also because changing state electoral fortunes affect the Centre as well. It would be wishful thinking to expect that an alternative ruling combination would produce any different results because, basically, that would be reshuffling the same deck of cards among the same set of players. Bringing in others, say, state leaders with relatively good economic records (who usually have fewer pressures and easier alibis for non-performance), to manage the national economy which has complex and extensive demands and pressures, would not guarantee more satisfactory results. The UPA does not really trust outsiders anyway, and it is anybodys guess at this stage how well any of the NDA state chieftains would function at the Centre if and when such a possibility does materialise. Union budgets are now obviously driven by short-term political considerations. The casualties of this approach are the pressing developmental priorities of efficient resource use and inclusive growth. That requires a separate discussion. In the meanwhile, I do not await the budget with bated breath. But I would be only too happy to have egg all over my face if Mr Mukherjee, the governments go-to guy for all reasons and seasons, delivers a blow for real development as an Ides of March surprise for us all.