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What is a Budget?

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.

Forecast Budget

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.

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.

Cash 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.