What Is The Purpose Of A Budget?

What Is The Purpose Of A Budget

You may have heard the word “budget” a thousand times. It’s a term that individuals, government, and organizations use now and then. The only question many don’t bother to ask is, what is the purpose of a budget when created? Does it have a positive impact, or it’s just another exercise in futility? Anyway, if budgeting doesn’t have any purpose, then governments or companies wouldn’t place any importance on it. That brings us back to the question;

What purpose does a budget serve? 

A budget serves numerous purposes. It provides a financial structure that guides you during the decision-making process. Budgeting also gives you complete control of your finances. A well-planned budget can help you achieve your dreams and eliminate the stress that comes with handling issues related to finance.

Read further to figure out more about this topic!

What’s The Meaning Of A Budget?

A budget or budgeting is relevant to the success of any business. When you plan, you will be able to tell how much it will cost to complete your project from start to finish. But when you fail to create a plan or budget, you won’t know to what extent your finances can carry you.

By definition, a budget is a process by which an individual or government creates a plan on how to allocate or use resources (money).

Parents can have a budget every year. The reason is to ensure he or she can utilize the available resources to take care of the children without any shortcomings. The budget might include their monthly feeding stipend, books, school fees, and other things.

The good thing about creating a budget is that it helps you to allocate your resources evenly. Budgeting also helps you to prioritize. It enables you to understand whether you have the financial power to handle any project you are embarking upon from start to finish.

Types Of Budget For Government And Businesses

The purpose that a budget serves is the same for the government, businesses, and household. The primary objective is to ensure the resource is evenly distributed to cover each area of a project or projects.

Here are the different types of budgets in a government and business setting.

Government Budget: Types And Things You Need To Know

The government deploys three types of budgets. These include balanced, surplus, and deficit budgets. Government budgets are usually prepared annually. The president prepares the budget and makes it available to the legislators for consideration. Once the legislators finish acting on the submitted budget, the president signs it into law.

Passing a budget into law might take a while, but it is a necessary process the government cannot ignore. Otherwise, the various agencies and arms of government will not be able to perform their duties. The finances needed for them to operate can only be available once the budget submitted to the legislators is approved and signed into law.

So, what’s a government budget? Well, this type of budget isn’t different from what you know about budget or budgeting. It is a financial statement prepared annually, to outline the government’s estimated expenditure and expected revenues for the upcoming fiscal year.

Here are explanations of the three types of government budget listed above;

1. Balanced budget:

The first type of government budget on this list is the balanced budget. It’s a term you will come across often, with regards to budgets concerning the government. Furthermore, when we say a government budget is balanced, what that implies is that expenditure and expected revenue is equal for that fiscal year.

This type of budget is popular among classical economists and emphasizes the need for one to live within his or her means. Classical economists are also of the opinion that government expenditure shouldn’t be higher than the revenue it generates.

However, it is much easier to balance the expenditure estimated with the revenue anticipated when planning the budget. It does look simple on paper, but the implementation has always been a major challenge. Notwithstanding, if the government can implement it, a balanced budget could have a positive impact on the economy.

It can make economic stability attainable and prevent the government from funding expenditures not captured in the budget. By and large, the balanced budget does have some drawbacks. One of them is that the government cannot rely on it during an economic recession. Plus, it will make it difficult for the government to spend heavily on public welfare. Let’s go over to the next government budget type, the surplus budget.

2. Surplus budget:

Surplus means having something in abundance. In a government, the surplus budget is one whereby the expected revenue of the government is higher than the estimated expenditure for that fiscal year.

What this type of budget implies is that the revenue the government generates from taxpayers is higher than what is being spent on public welfare. This budget, called the “surplus budget,” is deployed during inflation, and the main reason is to lower aggregate demand.

3. Deficit budget:

The word “deficit” is the same as you know it. In monetary terms, it means the total money spent is way bigger than the amount received. So, what does a deficit budget imply? It means the expenditure of the government far exceeds the revenue generated for that fiscal year.

The deficit budget isn’t typical in developed economies. It is more prevalent among developing economies or countries of the world. This type of government budget can prove helpful when such an economy is hit by a recession, too.

However, on the positive side, the deficit budget allows governments to spend the revenue generated or borrowed on the public. That’s one of the merits that sometimes make it a viable option.

Furthermore, there are also disadvantages of operating such a type of budget. One of them is the increased debt profile on the government. Another is that it encourages corruption, which is majorly the reason many of these developing countries are backward.

Business Budget Types

Next is the budget commonly used by different businesses, whether small or big. It is essential to note that these budget types are entirely different from the ones deployed by the government.

Also, these business budgets can be applied by any organization or industry. The only that some firms or organizations might choose to deploy the type that best suits their needs or the nature of their businesses. So, below are the different types of budgets businesses use.

1. Operating budget:

This type of budget involves the analysis and forecasting of projected expenditure and income over a specific period. It takes into account various factors. These include labor costs, overhead manufacturing costs, production, sales, material costs, and administrative expenditures.

2. Cash flow budget:

This helps companies to determine whether they are managing their finances appropriately or not. It is used to project how and when cash flows into and leaves the firm.

3. Financial budget:

What you will find in such a budget is the company’s strategy involving how to handle its asset income, expenses, including other financial aspects of the business.

4. Marketing budget:

The marketing department is the brain box of the business and does have a different budget. The budget covers the promotional and other marketing activities the department would perform for that financial year. And of course, a successful marketing campaign will help the company to generate more revenue and increase the customer base.

The Importance Of A Budget: Things You Need To Know

When most people hear the word “budget,” the first thing that strikes their minds is an elaborate financial plan. Now hear this; your budget doesn’t have to be voluminous. It doesn’t have to. You can make it as brief as possible and focus on highlighting the critical areas of the project or things your budget would cover.

It is essential to note that having a budget can help in several ways. Since it gives you the power to draft a spending plan, it will help ensure that money is always available to get the things you desperately need.

Having a budget can prevent you from owning too much debt and eliminate lack at the same time. And even if you’re currently in debt, you will still benefit from drafting your budget plan. It will help you to become debt-free.

Conclusion

There’s no business or nation that doesn’t place value or budgets. They all do because of its importance. Otherwise, it won’t take long before they hit rock bottom. Budgeting also eliminates time-wasting when it comes to financial management, and the list goes on and on. But the important thing is that a budget serves numerous purposes, which an organization, nation or individual can benefit from massively.

You May Like These Articles As Well:

Are CEOs Paid Too Much?

How To Start An Investment Fund?

Does Wells Fargo Cash Savings Bonds?