Definition:
A budget is a financial plan that outlines a company’s expected income and expenses over a specific period of time. It’s a tool used to manage resources, set goals, and track performance.
Types of budgets:
- Operating budget: Forecasts a company’s income and expenses from day-to-day operations.
- Capital budget: Plans for major expenditures, such as new equipment or facilities.
- Cash flow budget: Forecasts a company’s cash inflows and outflows.
- Master budget: A comprehensive budget that includes all of the above.
Key components of a budget:
- Revenue forecasts: Estimates of expected income from sales and other sources.
- Expense forecasts: Estimates of expected expenses, such as salaries, rent, and materials.
- Assumptions: Underlying assumptions about economic conditions, market trends, and other factors that may affect the budget.
Why are budgets important?
- Planning: Budgets help companies plan for future expenses and revenue.
- Resource allocation: Budgets help to allocate resources efficiently.
- Performance measurement: Budgets can be used to measure performance and identify areas for improvement.
- Decision-making: Budgets can inform decision-making about investments, pricing, and other strategic matters.
In essence, a budget is a financial plan that outlines a company’s expected income and expenses, and it’s a crucial tool for managing resources and achieving financial goals.
