Types Of Budget
At some point in our lives, we’ve given ourselves some pep talk on how we need to spend our money. The pep talk might not be enough, for most of you, you’ve had to practically draw out an Excel spreadsheet or do some doddles on your jotter or notepad and have taken stock on what you need allocate your finances to or how to spend it. This whole process is known as budgeting.
Budgeting and budget are two different things but they serve the same purpose. Budgeting stands to serve as the overall process of preparing and using a budget, it’s a process that helps a company or an individual’s estimated income (could be the money that comes as salary or from selling goods and services) over a specific period in the future. On the other hand, a budget is also known as cash flow and is a financial plan for a specified period of time.
Where Does the Word Budget Come From?
The term budget comes from an Old French word bougette which means small leather purse. Its first use was from a pamphlet The Budget Opened by William Pulteney. He (William) used the term budget to describe and critique the government’s fiscal policy on wine and tobacco.
Components of A Budget?
Now that we have a brief instance of where a budget is used and its history, this section will cover the components or elements of a budget. What does this area cover, you may ask? It helps breaks down what things to look out for before coming up with a budget. Do you have to have an income before setting up a budget? What do fixed and flexible expenses stand for? All these will be looked at in this section.
1. Income
An income is literally the foundation your budget is built upon. Where are you getting your money from? From your workplace, monthly allowance or service you rendered. Are these sources consistent? Income refers to the total revenue that comes in daily, bi-weekly, monthly and yearly.
2. Expenses
Expenses are what you spend your money on. Grocery shopping, car maintenance, light and water bills, college fees, and debt are expenses. It falls into three categories:
i. Fixed expenses: I refer to them as permanent expenses. They cost the same amount every month and can’t easily be changed; they can be paid regularly (weekly, monthly, quarterly or yearly). Few examples are health insurance, mortgages, renter’s insurance, phone and utility bills, tuition bills.
ii. Flexible expenses: These are what you want to splurge on, you want them but you don’t necessarily need them. They may be in be a form of entertainment or leisure. They are in contrast to fixed expenses; they can also be referred to as inflexible expenses. Few examples of flexible expenses are groceries, dining out, clothing, entertainment (books, movies).
iii. Unplanned expenses: They can be referred to as emergency expenses. They are kept aside for unforeseen or critical situations. Pet emergencies (surgeries), unplanned travels, medical costs and car troubles are cases of what falls under unplanned expenses.
Types of Budget
We have a better understanding of what budget is and the various components, let's rundown the various types.
1. Personal Budget
This focuses on expenses you spend on yourself, your family and your home. Having a budget is handy here because it helps you prioritise your needs and what to spend more attention on.
2. Revenue Budget
This type of budget act as a forecast for a company’s sales revenue and expenditure. What makes a revenue budget solid include; the number of units (goods or products or services) sold, sales revenue, operational expenses, capital expenses.
Why are these necessary? They help establish and guide if a company possesses enough financial means to conduct more operations, grow the business and more importantly, make profit. Revenue budget makes sure businesses can allocate resources efficiently which saves time, energy and money.
3. Production Budget
Before the personal items you own got to you, they had to pass through production.
The number of units that must be made or manufactured are calculated with the help of a production budget. Managers use this budget as a planning tool in scheduling future production processes and machine times.
This helps a company track cost and the workflow to make sure everything is produced timely.
4. Marketing Budget
This budget is used in the sales force. It is usually an estimated amount of cost allocated or required to promote products or services. Marketing plays a key role in any and every industry, from the show business to eateries. They can come in form of advertisement, customer surveys, printed materials and social media participation.
5. Conditional Budget
This type of budget is used by companies with high fixed costs and fluctuating income. It helps them structure their expenditures and income according to their respective priorities.
Now that we know what budget is, we have a better understanding of the various types and a better way we can spend our money.
