Budgeting

A budget is an official statement of the projected income and expenses based on future plans and goals. This is to say that, a budget is a document that management makes to estimate the revenues and expenses for an upcoming period based on their goals for the business. In the broadest sense, a budget is an allocation of money for some purpose.

Types of Budget

There are four (4) common types of budgets that businesses use:

  1. Incremental: This takes previous year’s actual figures and increases or reduces a percentage to get the present year’s budget, it is the most common method of budget because it is easy to understand.
  2. Activity-based budget: This is a top-down budgeting method that determines the amount of input essential to support the target or output set by the business.
  3. Zero-based: this is one of the most commonly used budgeting method. It starts with the assumption that all department of budgets are zero and must be rebuilt from scratch. Managers must be able to justify every expense.
  4. Value proposition: In value proposition budgeting, the budgeter considers the following questions;
  • Why is this amount included in the budget?
  • Does the item create value for customers, staff, or other stakeholders?
  • Does the value of the item outweigh its cost? If not, then is there another reason why the cost is justified?

Budgeting is a process of looking at a business’s estimated income (the money that comes into the business) and expenditure (Money that goes out from paying expenses) over a specific period in the future. It allows a business to see if they will be able to continue operating at their expected level with these projected incomes and expenditures.

Benefits of Budgeting

Budgeting helps to maintain control of expenditure. It ensures the financial aspect of the organizations goals are considered and are being monitored as failure in this area could be catastrophic. Budgeting helps monitor the following areas:

  • Planning (Long & short term)
  • Profitability review
  • Performance evaluation
  • Funding planning
  • Cash allocation

Budgeting is one of the most vital aspects of the finance function as it hinges on planning and execution; which births productivity.

Kalu E. (2020)