Budget Definition

Budget is a financial plan that outlines how a company intends to allocate its resources, such as money, for specific purposes and activities over a set period, typically a year, to achieve its financial goals.

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The definition of a budget is a spending plan based on a person or company’s income and expenses. A budget is an estimate of money made and spent over a defined period of time.

What Is a Budget?

The meaning of “budget” can be slightly different depending on whether you’re creating a budget for your business or for your personal life. In your personal life, creating a budget might involve simply making a list of your expenditures and matching them up with your expected income.

When creating a budget for your company, the process usually begins by establishing assumptions for the set budget period. “Assumptions” are reasonable guesses about sales trends, cost trends, and the overall economic outlook of the market and your business. You’ll also want to monitor specific factors that may impact your company, like supply chain issues, customer relationships, or renewal dates of large contracts.

Budget Advantages

If you’re not convinced that having a budget benefits both individuals and companies alike, we’ll go through some budgeting advantages below. Some people think that budgets are only for those with limited resources. However, the budget definition has nothing to do with the amount of money you have. Budgeting focuses on how to plan your spending. Advantages of having a budget include:

  • Understanding exactly how much money you have
  • Creating a comfortable amount of savings and investments
  • Handling spending decisions with both short and long-term vision
  • Managing and servicing debt appropriately

Having a good budget won’t be a cure-all for every financial challenge you or your small business will face. However, using a well-planned budget to guide your financial decisions can help you make the best decisions for your company. A budget can also help you plan for taxes and any potential liabilities your business may face.

Budget Examples

Budgeters typically rely on two types of budgeting: static or flexible budgets. We’ll explain each type below. 

Static Budgets

A static budget doesn’t change, even if key factors change during the budgetary period. At the end of the period, you would identify whether you went “over” or “under” line items on your budget. You would then use that information to tweak your budget for the next quarter or year.

Flexible Budgets

A flexible budget can change depending upon external values. For instance, in a flexible budget, if sales or production levels change, then that line item on the budget would change. Similarly, in a personal budget, if your personal investments suddenly begin doing very well, the line item for “vacation” or “new car” might increase accordingly. 

Budget: Summary

  • A budget is an estimation of revenue and expenses over a specified future period of time and is used by governments, businesses, and individuals.
  • A budget is basically a financial plan for a defined period — normally a year — that greatly enhances the success of any financial undertaking.
  • Corporate budgets are essential for operating at peak efficiency.
  • Aside from earmarking resources, a budget can also aid in setting goals, measuring outcomes, and planning for contingencies.
  • Personal budgets are extremely useful in managing an individual’s or family’s finances over both the short and long-term horizon.

How We Can Help Your Small Business

Ready to put those budgeting skills to work and start your small business? We can help get your company up and running. Our Corporate and LLC Formation services can help you set up your company. What’s more, our complete suite of business services, from our Worry-Free Compliance Service to ZenBusiness Money, can help your company stay on track. And once you’re up and running, our Accounting Basics for Your Small Business can help you gain the confidence you need to keep track of your money in your business bank accounts.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.

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Written by Team ZenBusiness

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