We explain what a budget is, its purpose and importance. In addition, we explore public budgeting, and more.
What is a budget?
A budget is a detailed plan outlining an estimation of the anticipated expenses required for a project or business for a given period of time. It is a tool that allows to calculate the amount of money and resources needed to achieve a certain goal.
Etymology: The word budget comes from the Latin prae, meaning "before" and suponere, meaning "to suppose". It makes reference to "anticipate" or "estimate something for the future".
A budget makes possible to manage finance, reduce uncertainty generated by market volatility, and influence decision-making in order to meet short or long-term goals and objectives, whether for individuals, families, companies or countries.
- For example: To budget a trip, the cost of airfares, cabs or trains for internal transfers, accommodation, and food need to be estimated, among other expenses. Once the budget is set, it is possible to determine the amount of money necessary for the trip, and if savings are needed, a specific date can be scheduled.
In the case of companies, a budget is usually more complex: it may be prepared by departments, or according to deadlines and projects. In business, a budget is part of a company's financial statement, an extensive document containing a company's financial information.
- A budget is an estimate of the expenses associated with carrying out a project or business.
- It consists of a list of material and human resources acquired or to be acquired, and their respective price or cost.
- It serves to control the finances of both households and companies.
- See also: Trade
What is the purpose of a budget?
The purpose of creating a budget is:
- To estimate the money that needs to be spent or invested in a given period of time.
- To determine whether it will be necessary to save money, request a loan or plan the project in stages.
- To establish financial control in order to forecast potential debts.
- To make a financial forecast of the business or project.
- To control corporate finance and prevent money deviations.
What is the importance of a budget?
A budget is an anticipated calculation plan that allows to maximize funds and foresee potential problems. It is an estimated forecast that may vary over time, but which nevertheless provides a fairly accurate vision of the future. It is a versatile tool that may contain various data and may be adapted to several needs.
Below are some cases where it is useful to prepare a budget:
- To calculate the expenses of the family for next month. Last month’s spending should be considered, including taxes, rent, food, health care, school supplies, clothing, and utilities, among other expenses.
- To calculate production costs. It is necessary to consider the costs of raw materials, supplies, labor, rental or purchase of machinery, logistics and taxes. Depending on a country’s economy, extra expenses may be forecast which may arise after the budget has been created, such as price percent change due to inflation or tax charges due to new legislation.
- To calculate corporate administrative expenses. It is necessary to consider the expenses required to run a business such as rent, machinery, salaries and social security contributions, utilities and taxes, accounting services, among other fixed expenses.
A public budget is a financial document with the character of a national law presented every year in which the state's revenues are planned according to the socioeconomic priorities and the needs of the population and the nation, and which is intended for the provincial and municipal states. The budgetary process is carried out between the executive, legislative, and judicial powers.
The public budget calculates the necessary funding for the functioning of the state for the next year, and covers various areas, such as health, transportation, education and culture, national security, and social security.
Example of a budget
The monthly budget of a typical family is a useful tool to calculate the month's expenses and also to determine whether part of the income will be allocated to savings, or to define which monthly expenses will be reduced in order to save.
Below is a breakdown of a family’s monthly expenses:
|Type of expense||Cost in US dollars (USD)|
|Housing and vehicle taxes||180|
|Internet and mobile phone||65|
|TV and platform subscriptions||30|
|Food and drinks||300|
|Personal hygiene products||25|
|Vehicle insurance policy||15|
|English course fee||22|
|Clothing and accessories||105|
|Total monthly expenses||USD 2662|
Importance of a budget
A budget allows planning, forecasting expenses, and securing finance in different areas, ranging from a household or a small business, to a company, or the state. It is not enough to have enough money; it is also important to know how to manage it. Creating a budget makes it possible to organize and better manage money to reduce uncertainty in the near and distant future.
- For example: In a situation of economic crisis and inflation in a country, though there may currently be enough public funds, currency will eventually lose its value. Planning a monthly budget that considers price percent change due to inflation allows for a better management of funds over a period of time.
A budget considers necessary and forecast expenditures as well as unexpected expenses and savings, among other variables. It is part of a financial plan: a record of all the financial activity of a business or company, which includes the income and expenditure in a given period of time. In addition, it includes an estimate of anticipated revenues and expenses to make a business forecast.
- MacNeil, C. (2022). ¿Cómo crear y cumplir con el presupuesto de un proyecto?. https://asana.com/.
- BBVA, (2022). ¿Qué es un presupuesto y cómo elaborar uno con base en objetivos y metas?. https://www.bbva.com/.
- Rodríguez, J. (2022). Los 8 tipos de presupuestos, sus características y ejemplos. https://blog.hubspot.es/.