Preview

The Definition of a Budget

Good Essays
Open Document
Open Document
467 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
The Definition of a Budget
What is a budget?
A budget is a forecast of revenue, expenditure and profit. Most budgets are revised annually.
What does it achieve?
There are two (often overlapping) reasons for producing a budget. One is to persuade potential investors that your company is a good bet. The other one is to plan your business finances – how much money do you have and how do you plan to use it? How much revenue do you need to generate to achieve your target profit? Is your business plan viable or does it need adjusting? In retrospect, did the year pan out the way you planned, or did something go wrong?

How to approach a budget
First, find out how your accounting software deals with budgets. It’s far more efficient to use the same package for accounting and budgeting. Next, meet your accountant to plan how to structure the budget. Arrive prepared, with a chart of accounts and a list of informed questions. Take copious notes.
Traditional budgets are very difficult for start-ups and firms with a short history, because there is little or no historic data. Revenue is particularly problematic, because no matter how carefully you have planned, it’s impossible to predict the future. There are two main approaches to budgeting:

The projections approach
Here you enter projected costs and projected revenue, and calculate projected profits from these. This is a reasonable and rational if the company has several years of relatively stable history to project from. If it is a new company, such a budget is likely to become an exercise in denial and wishful thinking.

The required profit approach
An alternative method is to enter projected expenses, and then calculate how much profit you require, and how much you think you can actually generate.

Eventually this should be enough to pay your salary and provide a return on your investment in the company. However, it might be realistic to plan for a loss in the first year or two, and only a small profit for a year or two thereafter.
Having settled on

You May Also Find These Documents Helpful

  • Better Essays

    A budget is a tool that helps managers to ensure that the required resources are obtained and used effectively and efficiently as the organization moves towards achievement of its objectives. The budgets are determined yearly and are based upon the previous year’s budget and variances. This paper will discuss a development of operating budget, comparison expense results with budget expectations, description of possible reasons for variances and strategies to keep results aligned with expectations, recommendation some benchmarking techniques that might improve budget accuracy.…

    • 1735 Words
    • 7 Pages
    Better Essays
  • Better Essays

    Hcs 571

    • 1318 Words
    • 6 Pages

    A budget is an instrument used to help managers ensure that the resources used effectively and proficiently toward the goals of an organization. A budget projection can be made on a yearly base depending on previous year or existing one. They can further be broken down quarterly or monthly depending on it use. Generating a budget is complex undertaking, and for a budget to be effective the organization ought to follow it strictly. However, no matter how closely a business follows their guidelines there will always be some form of variances. The organization should expect a few variances and be able to work these discrepancies in any budget constraints.…

    • 1318 Words
    • 6 Pages
    Better Essays
  • Better Essays

    Operating Budgets Paper

    • 1124 Words
    • 4 Pages

    Budgets are systematic plans that organizations use to manage objectives and goals. They are important documents that bring out important aspects of the organization and provide information to direct that organizations activities (Johnson, 2005). They are basic planning tools that help managers make decisions within the organization. Budgets vary in different organizations by type and size. They are routine and an important part of any organization.…

    • 1124 Words
    • 4 Pages
    Better Essays
  • Good Essays

    D1 unit 2 Level 3 Business

    • 2415 Words
    • 10 Pages

    In a business, there are several different types of budgets that has different department/area the business has to make. For example, in a business, you can find the sales and revenue budget (a financial document that set out the business expected sales and revenue from selling its products or services), the expenditure budget (financial document that sets out the expected expenditures of a monthly basis on those items) and the profit budget (financial documents that sets out the predicted profit that a business could make).…

    • 2415 Words
    • 10 Pages
    Good Essays
  • Powerful Essays

    Buss1 Key Terms

    • 2457 Words
    • 10 Pages

    Budget – A budget is regarded as a goal or a “yardstick”; it’s something a business uses in order to work to, for example: a firm may have budgeted fixed costs of £5000, they aim to either meet this budget or fall below it to operate to the desired level.…

    • 2457 Words
    • 10 Pages
    Powerful Essays
  • Good Essays

    There are two different types of budgeting periods, periodic moving budget and milestone budgeting (Liebler & McConnell, 2012). Both types of budget periods are very useful, however the company should pick the type that best suits their requirements and limits. In addition, there are also various types of budgets and different approaches to budgets; again, the company should pick the method that best suits their needs and limits. It might also be beneficial for a company to have a general audit in order to prevent issues such as fraud. In addition, I would also make sure to follow the budgetary process. There needs to be an initial preparation, review and approval process, and then an implementation phase (Liebler & McConnell, 2012). Furthermore, I would also follow the six requirements of a sound budgetary procedure, which includes: a sound organizational structure, consistent budget period, development of adequate statistical data, reporting system, uniform code, and a regular audit system (Liebler & McConnell, 2012). By following the budgetary process and the six procedure requirements, I could ensure that my budgeting plan would be effective and fit the requirements…

    • 666 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Budget is forecast or estimate of what a business is going to earn or spend for the future. Budget can helps business manage its cost effectively because if business fails to do so then this may affect profit being damaged and makes business unable to pay their expenses and debt on time.…

    • 1704 Words
    • 7 Pages
    Powerful Essays
  • Good Essays

    Flexible Budgets Acc 543

    • 971 Words
    • 4 Pages

    A budget is a quantitative expression of a plan of action. Budgets help to coordinate and implement plans and are considered as chief devices for disciplining management planning (Horngren et al. 2008). It is very important for employees to understand the concept of budget operations. Knowing budget operations can eliminate the possibilities for incorrect information to be reported.…

    • 971 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    M4 Unit 2

    • 593 Words
    • 3 Pages

    Budget: An estimate of costs, revenues, and resources over a specified period, reflecting a reading of future financial conditions and goals. One of the most important administrative tools, a budget serves also as a plan of action for achieving quantified objectives, standard for measuring performance, and device for coping with foreseeable adverse situations.…

    • 593 Words
    • 3 Pages
    Satisfactory Essays
  • Better Essays

    A budget is a plan of allocation of resources to accomplish and organizations’ objectives and goals for a specific amount of time (Ganapati, n.d.). The budget gives a detailed analysis of how an organization will spend and receive money in a fiscal period.…

    • 919 Words
    • 4 Pages
    Better Essays
  • Good Essays

    A budget plan is the most effective way to keep the business and its finances on track. It gives you the opportunity to review the business’ performance and any factors that are affecting or may affect your business. Also to manage your money more effectively, allocate appropriate resources, monitor performance, meet planned objectives and plan for the future.…

    • 663 Words
    • 3 Pages
    Good Essays
  • Good Essays

    Competition Bikes Task 2

    • 1502 Words
    • 7 Pages

    A budget is a plan expressed quantitatively in detail. This detailed plan spells out how the company will acquire resources as well as how the resources will be allocated for a specific time. The budget is used for projecting future income and expenses. The purpose of a budget is the assist the company in providing a methodology in determining what direction to go, to improve efficiency, delegate responsibility and provide a means of controlling the finances of the company. In some cases, managers use budgets to determine how to set targets and standards for employees.…

    • 1502 Words
    • 7 Pages
    Good Essays
  • Good Essays

    A budget is a plan which predicts how much a company makes in revenues and how much it is going to pay in expenses and so predicts a profit or loss. A budget is can be prepared whenever a company wants two and for however long a period of time it wants to prepare it for. Companies and people would budget in order to avoid overspending and even if this does happen as it will predict how much money will be needed then the person/ business can arrange for it by getting an overdraft facility or loan. There are two types of costs, the first is fixed costs which stay the same and the other is variable costs which are always changing. Shareholders and banks may want to see budgets as the shareholders may want to know how well the company is predicted to do and banks may want to see it in order to get a clue on whether the business/ person will be able to pay back the money borrowed.…

    • 1637 Words
    • 7 Pages
    Good Essays
  • Good Essays

    Budgeting

    • 770 Words
    • 4 Pages

    A budget is a key management tool for planning, monitoring, and controlling the finances of a project or organization. It is also defined as management’s quantitative expression of plans for forthcoming period. It also estimates the income and expenditures for a set period of time for your project or organization. Budgets are prepared at various levels of an organisation.…

    • 770 Words
    • 4 Pages
    Good Essays
  • Good Essays

    Unit 2 D3

    • 1009 Words
    • 3 Pages

    A budget is an documented summary of likely income and expenses for a given period. It is important because it helps a business you determine whether they have the money to spend on certain things or not, and if they need to spend more in certain areas. It is created using a spreadsheet, and it provides a concrete, organized, and easily understood breakdown of how much inflows and outflows of money that is going through the business. It’s an helpful tool to help you prioritize your spending and manage your money.…

    • 1009 Words
    • 3 Pages
    Good Essays