What is a budget?

A budget is a document that forecasts the financial results and financial position of a company for one or more future periods.  At the most minimal level, a budget contains an estimated income statement for future periods.

A more complex budget contains a sales forecast, the cost of goods sold and expenditures needed to support the projected sales, estimates of working capital requirements, fixed asset purchases, a cash flow forecast, and an estimate of financing needs. This should be constructed in a top-down format, so a master budget contains a summary of the entire budget document, while separate documents containing supporting budgets roll up into the master budget, and provide additional detail to users.

Many budgets are prepared on electronic spreadsheets, though larger businesses prefer to use budget-specific software that is more structured and so is less liable to contain computational errors.

A prime use of the budget is as a performance baseline for the measurement of actual results. It can be misleading to do so, since budgets typically become increasingly inaccurate over time, resulting in large variances that have no basis in actual results. To reduce this problem, some companies periodically revise their budgets to keep them closer to reality, or only budget for a few periods into the future, which gives the same result.

Related Topics

What is a budget variance?
What is a flexible budget?
What is a rolling budget?
What is a static budget?
What is continuous budgeting?