Budgeting is the process of creating a plan to spend your money. This spending plan is called a budget. Creating this spending plan allows you to determine in advance whether you will have enough money to do the things you need to do or would like to do. Budgeting is simply balancing your expenses with your income
Types of Budgets for Businesses:
Master Budget A master budget is an aggregate of a company's individual budgets designed to present a complete picture of its financial activity and health.
Operating Budget An operating budget is a forecast and analysis of projected income and expenses over the course of a specified time period. Operating budgets are generally created on a weekly, monthly, or yearly basis.
Cash Flow Budget A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period.
Financial Budget A financial budget presents a company's strategy for managing its assets, cash flow, income, and expenses.
Static Budget A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue. A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage, regardless of how much inventory it moves in and out due to increased or decreased sales.
What is the 50/20/30 budget rule?
Senator Elizabeth Warren popularized the 50/20/30 budget rule in her book “All Your Worth: The Ultimate Lifetime Money Plan.” The basic rule is to divide after-tax income, spending 50% on needs and 30% on wants while allocating 20% to savings.
The Budget Process
The budget process is the way an organization goes about building its budget. A good budgeting process engages those who are responsible for adhering to the budget and implementing the organization’s objectives in creating the budget.
Steps for developing a good budgeting process:
1. Write it down
2. Decide who should be involved and when
3. Establish an annualized timeline.
4. List specific tasks with specific responsibility assignments
5. Ensure that budget line items and accounting line items are in sync.
6. Develop worksheets, templates, and tools that promote inclusion of all relevant budget components and facilitate ‘what if’ scenarios.
7. Adopt policies for adhering to budgets, handling variances, approval authority etc.
Benefits of Budgeting
Budgets don’t guarantee success, but they certainly help to avoid failure. It is crucial to remember that a large organization consists of many people and parts. The budget is the tool that communicates the expected outcome and provides a detailed script to coordinate all of the individual parts to work in concert. When things don’t go as planned, the budget is the tool that provides a mechanism for identifying and focusing on departures from the plan.
The budget provides the benchmarks against which to judge success or failure in reaching goals and facilitates timely corrective measures. Operations and responsibilities are normally divided among different segments and managers. This introduces the concept of “responsibility accounting.” Under this concept, units and their managers are held accountable for transactions and events under their direct influence and control.
Once the plan for resource allocation is determined, a good manager will support the plan and move ahead to maximize results for the overall entity. Personal managerial ethics demands loyalty to an ethical organization, and success requires teamwork. Here, the budget process is the device by which the greater goals are mutually agreed upon, and the budget reflects the specific strategy that is to be followed in striving to reach those goals. Without a budget, an organization can be destroyed by constant bickering about case-by-case resource allocation decisions. Another advantage of budgets is that they can be instrumental in identifying constraints and bottlenecks. Knowledge of these sorts of potential problems is the first step to resolving or avoiding them.