We explain what the budget is and why it is so important. Also, elements, characteristics and real examples.
What is budget?
A budget is a document detailing the expected expenses and profits of an organization company or entity (private or state) in a specific period of time.
Preparation and execution of a budget It has four steps or requirements: its preparation, approval by the corresponding individuals or organizations, execution and control. State budgets are regulated by law.
The central objective of a budget is to have control over purchases and sales, and quantify the income and expenditure of money. In addition, it has the purpose of preventing and correcting errors and carrying out financial controls of the entity or organization. The budget allows you to keep control to establish priorities and pursue objectives.
See also: Financial planning
Types of budgets
Budgets are classified based on different criteria:
According to time:
- Short-term budgets. They cover a period of time that does not exceed one year.
- Long-term budgets. They cover a period of more than one year and are used by large companies and states.
According to flexibility:
- Flexible budgets. They allow modifications to be made according to the circumstances that may occur.
- Rigid budgets. They do not allow modifications to be made despite any changes that may occur.
According to the economic sector:
- Public sector budgets. They are carried out within entities or organizations dependent on the State. They include all those expenses and investments that derive from public management.
- Private sector budgets. They are carried out in companies or organizations that do not depend on the State but are in private hands.
Depending on the area within the organization:
- Main budgets. They are made taking into account the budgets of all areas within the organization and include auxiliary budgets.
- Auxiliary budgets. They are carried out based on a specific area within the organization.
Importance of the budget
The budget is a fundamental piece in any organization that has income and expenditure of money, since it allows plan operations to meet the proposed objectives.
It is done in advance to determine and organize the amount of money or resources that are expected to be available over a period of time (which is usually a year). Having this control allows, among other things:
- Control income and expenses.
- Measure the risk and reduce it.
- Review the tactics and policies taken by the agencies.
- Carry out financial control.
- Set goals and objectives based on the available budget.
Elements of a budget
When planning and making a budget, certain elements must be clear:
- Resources. Everything necessary to achieve the objectives is taken into account.
- Context. The social, political and economic framework in which the activity will be carried out is analyzed.
- Aim. The goals to pursue are defined.
- Plan. The way in which the goals will be sought to be achieved is defined.
- Operations. The income that is expected to be achieved is detailed, as well as the expenses.
- Human resources. All individuals representing the different areas of the organization are involved.
Characteristics of a budget
The main characteristics of every budget are:
- It’s regular. It is carried out in specific periods of time.
- It is comprehensive. Takes into account all sectors and areas of the organization.
- It is foreseeable. It seeks to foresee and organize a future period of time.
- It is quantitative. Use a monetary unit to represent the action plan.
- It is goal oriented. Seek the achievement of general or particular goals.
- It’s detailed. Includes all the information necessary for the description of situations.
- It’s realistic. Make projections based on concrete and reliable data.
Continue with: Accounting
References
- “Basics of a project budget template” in OBS Business School.
- “Budget” on Wikipedia.
- “10 characteristics of the best budgets” at Virginia Credit Union.
- “Budgeting vs financial forecasting: What’s the difference?” on Investopedia.
