What Is a Budget

Budget in business terminology refers to the designed allocation of existing resources for every unit in an organization. This method of planning is called budgeting; this helps the management in controlling the money in productive areas that can generate good income for the organization. A budget is set only in consultation with accountants, financial specialists and other departmental heads of the organization.

In our daily life also everyone uses budgeting. We all make a monthly budget on how much should be spent on our living expenses. In this way budget is very helpful to normal people as well to cut down on unnecessary expenses being made. The key to any budget is that it is both flexible and inflexible. Many of the expenses are of fixed in nature, for example the rent of office building for an organization is fixed. Hence this amount is inflexible and it has to be paid fully.

Budget should sometimes be flexible, it might not always be possible to assign fixed amount of expenditure. There are always some unexpected events that might occur; hence the budget of a company should cater to such unexpected events. If a budget is not flexible then a resource allocated for one purpose cannot be relocated to another in case of financial emergency.

For any company the financial experts design various types of budgets.

Master budget: as the name suggests it is a overall financial and operations budget for a particular financial year. This budget is either prepared annually or quarterly, it a group of many small budgets put together. Generally the layout of master budget depends on the size of the company.

Financial and operating budgets: this budget handles the costs of production of goods and services that are operative in nature. The financial budget handles the prospective assets, liabilities and equities of the business. This budget takes care of the financial stability of the organization.

Cash budget: this is a very vital budget for any organization. It handles the cash planning and controlling which means it forecasts the cash inflow and outflow of the company. The cash budget helps the company to have a better cash balance in case of fiscal emergency.  This budget deals with four important sections.

  • Receipts like cash at the beginning of the year, cash that is received from customers etc.
  • Expense section that handles all the payments made by the company.
  • Deficit or surplus that represents the difference between cash received and cash that is paid.
  • Financing section ultimately provides a detailed report of any money borrowed and any repayments that were made during the financial period.

As long as cash is flowing in and out of the company is good, but it is always good for small or big organizations to have a budget in place to survive financial crisis that may arise during the process of the business.