What is a Budget?

A budget is the sum of the amount allocated for a specific purpose and the summary of expected expenses with a plan to meet them. In general, the word 'budget' is used for the financial planning of an individual or an organization for their estimated income and spending.

We can define a budget as a financial or quantitative statement prepared before a specific period of time of the policy to attain the goals and to control the future functions.

Significance of Budget

Budget is a bridge between where we are and where we want to be after a particular time period. Budgets play a vital role in everyone's day to day life, as it talks about the revenues, spending and a systemized plan. Or we can say it represents the amount in which an individual or an organization has to adjust their expenses in a particular period of time. 

A budget may be surplus, balanced, or deficit. The surplus budgets show that revenues for a particular time period are more than the expenses for the same. It represents the profit-making condition of an individual or organization, or government. This surplus amount can be used in different ways like development projects, for purchasing new assets, debt repayments, or can be invested for future uncertainty.

The balanced budgets are those which show that the income of a particular time period is quite enough to fulfill the expenses of that time period, neither more nor the less. This situation is called a trade-off, where the organization or the individual has no risk, and no profit position as all expenses are covered within the available funds. 

The deficit budgets are those which show the situation where the expenditures of a particular time period are more than the revenues for the same. This is a risky situation for anyone because, in such a condition, one has to use its investment and drop out of the development programs. In the case of an individual, it is very hard to adjust his personal budget because there so many responsibilities that should be fulfilled by him.

We can say that budget gives a pathway for future projects as it shows the current situation and estimates the future uncertainty. Budgets work as a blueprint to accomplish current and future projects. 

Features of a Budget

• Budget is a plan: It is a pre-planned statement about the income, expense debt, credits, cash flow, and the spending plan.
• Budgeting is a continuous process: As it never ends, to accomplish any task or project or a daily job, one needs to prepare a plan about income and expenses. Without a proper plan, we cannot do any task.
• Budgets have a universal application: Budgets are prepared by everyone, i.e., a government of a country, an organization, or an individual. Everyone needs a financial plan for their income and spending.
• Budgets are prepared to face future uncertainty:  Budgets are prepared on the basis of income and expenses, so it easily helps in predicting future uncertainty. So, one can be ready to face them.  
• Budgets are different for everyone:  If it is prepared by a government, then the government has to think about the whole country, and the expenditures and the revenues are considered at the macro level, and the impact will be seen in the long term. But when it is prepared by an individual, then he only makes a monthly budget with his monthly income and monthly expenses. And sometimes, it may be a daily or weekly budget on the basis of the income pattern of an individual. In the same way, while preparing the budget, an organization will consider its financial goals for the particular budget period.
• Budget is prepared for a particular time: The time period is fixed while preparing the budget. It may be short-term or maybe long-term.
• Budget is expressed in financial or quantitative terms: Budget includes the information about income, spending, payments, credits, debts, etc.; these all are in quantitative terms.

Classification of Budgets

The budgets are classified as following.

On the Basis of Time Period

• Short-term budget: The budgets which are prepared for one year or less than one year. Such as the Union budget prepared by the government, personal budget, administrative budget, material budget, etc.
• Long-term budget: The budgets which are prepared for more than one year. Such as capital expenditure budget, research, and development budget, etc.

On the Basis of Condition

• Basic budget:  Basic budgets are long-term budgets. These are the plans which require a huge financial and need a proper worksheet to implement. These are prepared regularly according to the estimated cash and credits of that specific time.
• Current budget: These are short-term or one-time budgets. These are prepared according to the current situation, such as any medical emergency, sudden breakdown in any asset, and unexpected expenses. For example, in today's scenario, COVID-19 has changed everyone's budget, and they have to use their emergency fund.

On the Basis of Functions Involved

• Master budget: It the summary of all the functional budgets. It is the combination of different interdependent budgets. As the name indicates, it is the overall plan of the organization. The master budget presents the Operating profit and the Balance sheet of the business. 
• Functional budget: As the name says, functional budgets are prepared according to the different functions of the business, i.e., production, sales, purchase, etc. These budgets are prepared by each and every department according to their respective functions. Functional Budgets, which are commonly found in a business concern, are as follows.

a. Sales budget:  It is constructed on the basis of sales target during a given time, both in quantity and value. It is the hardest work to estimate the demand of consumers for a specific time, so it is not easy to prepare a sales budget. It totally depends upon the consumer's choices and preferences. This task became more difficult in the case of a new product. The sales budget is the base of the production budget.

b. Production budget: The next budget is which is prepared after the sales budget is the production budget. This budget shows the quantity of product that must be produced to meet the sales target of the budget period. The opening and closing inventory should be kept in mind while preparing the production budget.

c. Purchase budget: It represents the total amount of raw material and other resources which are purchased during the budget period.

d. Plant utilization budget: This budget talks about the requirement of plant and machinery according to the production budget. It also helps in deciding the spending on plant and machinery. 

e. Capital expenditure budget:  It talks about the total budget amount that is going to be used for fixed assets during the budget period, e.g., land, building, patents, plant, and machinery, etc.

f. Cash budget: This budget predicts the liquidity position of the business for a specific time period and talks about income and spending. It also includes all bills receivable and bills payable. It estimates the cash balance of each month. It shows the current and future financial position of the firm. As it shows the liquidity position, so it also talks about the profitability condition of the firm. It also shows the requirement of any short-term borrowings or indicates the available funds which can be used for investment purpose. It establishes coordination of cash for sales, investment and debt, spending, and working capital. It also helps in arranging credit to the firm.

g. Financial budget: It shows the complete strategy of a firm to manage its income, spending, credit, and debt, and all other assets. It represents the all-over financial position of the firm.

On the Basis of Flexibility

• Fixed budget or static budget: As the name indicates, this budget shows an inflexible and rigid plan. This business budget is designed for such fixed spending that is unchangeable in any situation. Or we can say that this budget includes all the fixed expenses such as land, plant, and machinery, etc. These fixed expenses do not get changed according to the production level.  
• Flexible budget or dynamic budget: It is helpful in deducting the costs of production. A flexible budget is more naturalistic, functional, and helpful than a Static Budget. This budget includes the variable expenses which are affected by the volume of output, such as inventory cost, labor cost, etc. All these expenses can be reduced by using their substitutes and by bargaining.

Context and Application

The topic budget is studied under various disciplines as mentioned below.

• Bachelor of Business Administration
• MBA – Finance
• Bachelor of Commerce
• Master in Commerce
• Chartered Accountancy
• Company Secretary
• Apart from the above discipline, the topic is also referred to by professionals engaged in banking and financial institutions as Financial Advisor.