What is a budget?
A budget turns business goals into numbers. It forecasts revenue, costs, cash and sometimes capital spending for a set period. Once the period starts, actual results are compared with the budget to spot problems early.
Types of budgets
- Operating budget: revenue, cost of sales and operating expenses.
- Cash budget: expected cash in and out, to avoid shortfalls.
- Capital budget: planned spending on equipment, property and other long-term assets.
- Master budget: combines all of the above with a budgeted balance sheet.
Budgeting approaches
- Incremental: last year's figures plus or minus a percentage. Quick, but can lock in waste.
- Zero-based budgeting: every cost must be justified from scratch.
- Rolling forecast: continuously extended, for example always looking 12 months ahead.
- Flexible budget: adjusts costs to the actual level of activity.
How to build a simple budget
- Review last year's actual results.
- Forecast sales by month, product or customer group.
- Estimate variable costs as a percentage of sales.
- List fixed costs (rent, salaries, software, insurance).
- Add planned investments and loan repayments.
- Check the cash position month by month.
- Review monthly and investigate budgeting variances.
Why it matters
A budget gives a business a plan to measure against. It helps owners decide when to hire, how much to spend on marketing, and when they'll need financing, and it's often required by banks and investors.