What Is a Budget?

Definition & Examples of a Budget

Woman creating a budget in her home
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A budget is a financial plan used to estimate future income and expenses. The budgeting process may be carried out by individuals or by organizations. Budgets help an entity determine whether it can continue to operate with its projected income and expenses.

Keep reading to learn why budgets are important and some ideas to help you create one for your business.

What Is a Budget?

A budget is an outline for how an entity plans to maintain financial health. Budgets can be made by any entity that has financial concerns—whether it's a couple budgeting out their year, a corporation budgeting for the next fiscal quarter, or a government agency budgeting how it will spend its limited resources.

Many people use budgets to help control their spending. For example, a family may limit their restaurant spending each month to $100.

How Does a Budget Work?

A budget can be as complex or as simple as the entity wishes to make it. A budget may be jotted down on a notepad, or it may be carefully calculated using spreadsheet software. There are also financial software applications like Quicken or QuickBooks that are created specifically to help people create and maintain a budget.

Budgets are especially important for people starting and running their own businesses. A properly prepared and updated business budget serves several purposes.

Plan Startup Needs for Your Business Plan

Perhaps the most important aspect of budgeting for businesses is that it helps you gather information for a business plan, including all the items and expenses necessary for a startup. You need to know what it will cost you to open your doors on the first day of your business. It includes inventory, furniture and fixtures, computers, software, and the costs of finding and securing a location for your business. Budgets list all those expenses and income on an easy-to-reference document, which will be helpful to you and any potential financers.

Get a Business Loan

After a business is up and running, there are still times when you will need your budget and other financial spreadsheets to get a business loan. You will probably need to borrow money for a startup. A budget shows your lender how much you need and what your cash flow situation will look like in the first three years of your business. A reasonable budget can increase your credibility with your lender.

Plan Your Spending

Your budget can give you information about how much you can spend each month and how much you can take out of your business as a salary to live on. As you start out, you may not be able to take much, but you can see what the future looks like, and you can plan for your living expenses as you get started.

Know Your Required Profit

If you set up your budget on a "required profit" basis, you can see how much money you need to make to meet all your expenses, including personal expenses. A required profit budget starts with all the expenses you need to pay each month, leaving the required profit as the income number needed to balance the budget.

When you are estimating income and expenses, estimate income low and expenses high. In other words, be pessimistic about both income and expenses. Then, when something unexpected happens, you are prepared.

How to Create a Budget 

The process for preparing a monthly budget for your business requires collecting information and following some simple steps. You may wish to use a simple business budgeting worksheet as an outline to create your budget. Also, most business accounting software has a budgeting feature.

First, list all sources of monthly income or revenue. This will include sales revenue and interest from investments. If your business doesn't get paid immediately in the form of cash or credit, then deduct a percentage of your expected income for late-payments and non-payments by customers.

The budget process for an existing business is different from a business startup budget. An existing business will have a history of sales and expenses, but startup budgets have to make assumptions about revenue.

List all your required fixed expenses, like rent or mortgage and utilities like your phone bill. These are payments you must make every month, even if you have less income than expected. If your fixed expenses are too close to your expected income, you may have trouble making your payments. See if you can cut down on your fixed expenses or turn them into variable expenses.

Variable expenses are non-recurrent expenses that are tied to sales. For example, if you have fewer customers, you may need fewer phone or driving expenses. Include expenses to capture new customers in this list, like advertising expenses.

Create columns for actual and budgeted income and expenses, so you can see how the budget works out in real-time. If you're using budgeting software, you can use the "budget vs. actual" feature to see how your actual spending and income compare with your budget.

Key Takeaways

  • A budget is a financial plan that outlines an entity's expenses and income.
  • Any entity with finances can make a budget, including individuals, businesses, nonprofits, and government agencies.
  • A budget is an important aspect of a business plan.

Article Sources

  1. Federal Trade Commission. "Making a Budget." Accessed July 29, 2020.