Mother is the finance minister of majority of the houses. They know how to manage each penny using the fundamentals of finance. They make a budget for all the expenses in your house. Just like that, budgets are also important in business too. But do you know why the budget is so important, what is the role of a budget in a business, and what is the budgeting process? If not, then read our blog on what is the budgeting process.
What Is The Budget?
A pending plan based on income and expenses is called a budget. In other words, it’s a projection of your income and expenses for a specific period of time, like a month or a year.
A budget can be made for a person, group of people, government, or just about anything else that makes and spends money.
What Are The Types Of Budgets?
| According to function | According to flexibility | According to period | According to conditions |
(1) According to function
| 1 | Sales budget |
| 2 | Production budget |
| 3 | Material budget |
| 4 | Labor budget |
| 5 | Plant budget |
| 6 | Overhead budget |
| 7 | Research and development budget |
| 8 | Cash budget |
| 9 | Master budget |
(2) According to flexibilities
| 1 | Fixed budget |
| 2 | Flexible budget |
(3) According to period
| 1 | Long-term budget |
| 2 | Short-term budget |
(4) According to conditions
| 1 | Basic budget |
| 2 | Current budget |
What Is The Budgeting Process: Here Are Some Steps.
There is probably no one correct technique for creating a budget for your business. But to assist you in the procedure, here are a few steps for making a budget.
Step 1:- Select your Objective
First, you must decide your objective and why you want to make a budget. Because if your objective is not clear, then you can’t make a good budget. So it is a very important part of the budget process; you can’t avoid or skip this point.
Step 2:- Decide your Budget period
The budget period specified in the Notice of Grant Award (it is an award, usually financial, given by one company to an individual or a company to facilitate a goal or incentivize performance) is the time frame in which you are authorized to use the funds provided and must satisfy any matching or cost-sharing requirements.
Once you decide on your objective, you must also decide on your time frame. How long are you budgeting? It is a very important step because you can not make a budget until you can’t decide on your period.
Budgets are divided into two categories:
- Short term:
A budget prepared for less than a year ( monthly, quarterly, half-yearly) is called a short-term budget.
- Long term:
Long term budgets are created to show the organization’s long-term strategy. This budget is typically created for a three to five-year time frame. Examples include long-term financing, research and development, and capital expenditure budgets.
Step 3:- You need to Create a list of expenses
Write down a list of all the expenses you expect to have during a budget period. This list includes:
- Salaries and wages.
- Groceries.
- Insurance and rent.
- Mortgage payments.
- Miscellaneous expenses.
- Depreciation
- Advertising and promotions.
- Transportation cost.
- Travel.
- Savings.
- Office expenses.
Use your bank statements and receipts from the last 3 months to find all your expenses.
Step 4 :-Determine fixed and variable expenses
Those mandatory expenses that you pay the same amount for each time are called fixed expenses like:
- Mortgage and rent.
- Set-free internet service.
- Car payment.
- Trash pickup.
- Taxes.
- Phone and utility bills.
- Insurance premiums.
- Other loan payments.
- Other regulated expenses.
Variable expenses are the type that will change from time to time, like:
- credit card fees
- direct labor
- commission
- Entertainment.
- Gifts for employees
- Medical bills.
If you do not have an emergency fund, add a category for “emergency expenses.”
Start assigning an expense value to every category. Start with your fixed expenses. Then think about how much you will need to spend per month on variable expenses.
If you are unsure how much you spend in every category, then view your last 3 to 5-month expense receipts and bank transactions to make a rough estimate.
Step 5:- Calculate your net revenue
How much can you earn in a budget period? This is a very important step in creating a budget. Because if you don’t know how much you earn in a budget period, how can you create a budget? You need to calculate your monthly/ yearly ( budget period) income.
Step 6:- Write your budget assumption
Budgets are always based mainly on certain assumptions. These assumptions may be based on environmental factors, cost, or sales trends. Before beginning to prepare the budget, these assumptions must be thoroughly examined in light of the current environmental conditions.
Step 7:- Total your monthly income and expenses
You are off to a good start if your income is greater than your expenses. This extra money means you can put funds towards areas of your budget, like retirement savings and paying off debt.
If your income is less than your expenses, you are overspending and need to make some changes.
Step 8:- Make adjustments to expenses.
If your expenses are more than your income, find areas in your variable expenses where you can cut. Look for places where you can reduce your spending, like entertainment expenses, eating out, etc.
Step 10:- Now you can make a plan
It is the thinking process regarding the activities required to achieve the desired goal. After doing all the above steps, it is time to plan for the budget.
Step 11:- Implementation of your plan
It is the execution and practice of a plan, a method, any design, model, ideas, specifications, standards, and policies for doing something. In other words, implementation is the act of putting a decision and plan into effect. You need to implement the plan after making it.
Step 12:- At the end, review the budget
After the budget is created, it should be carefully examined to identify and fix any problems. At this point the answer for what is the budgeting process ends.
Conclusion On What Is The Budgeting Process
After reading this blog post on what is the budgeting process? I hope you understand what a budget is and its type is. Then we discussed, what is the budgeting process.
A budget helps control wasteful expenses in a business. Because resources are limited in every company, their allocation in the best possible manner is important for maximum returns. The budget guides the best possible allocation and utilization of resources.
