Budget definition

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What is a Budget?

A budget is a set of interlinked plans that quantitatively describe an entity's projected future operations. A budget is used as a yardstick against which to measure actual operating results, for the allocation of funding, and as a plan for future operations.

The budgeting process typically begins with a strategy planning session by senior management. The management team then applies the agreed strategic direction to a series of plans that roll up into a master budget. The plans include a sales budget, production budget, direct material budget, direct labor budget, manufacturing overhead budget, selling and administrative expense budget, and capital expenditure budget. All of these plans roll up into the master budget, which contains a budgeted income statement, balance sheet, and cash forecast. There may also be a financing budget in which is itemized the debt and equity structure needed to ensure that the cash requirements of the budget can be met.

Related AccountingTools Courses

Budgeting

Capital Budgeting

Effective Sales Forecasting

Personal Budgets

While budgets are most commonly found within organizations, they are also quite applicable to individuals. Since most people have constrained income amounts, it is helpful to set up an expense budget that itemizes how much they can spend without going into debt.

Advantages of Budgets

A budget provides structure to the process of expending funds, so that managers understand how much cash they are allowed to use, and when it can be disbursed. Budgets are especially useful for projects, where there is only a limited amount of cash available; in these cases, the project manager must work within the constraints of the budget.

Disadvantages of Budgets

A budget is subject to a number of problems, such as the "use it or lose it" mentality, whereby managers spend all funds allocated to their departments on the grounds that those expenditures form the basis for their budgets in the following year; not spending all allocated funds will therefore mean that the budget will likely be reduced in the following year.