Learn more about what a budget is in business.
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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.
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.
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:
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.
Budgeters typically rely on two types of budgeting: static or flexible budgets. We’ll explain each type below.
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.
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.
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Disclaimer: The content on this page is for informational 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.