When most people think of budgeting, they tend to associate it with a money management tool such as an accountant or money management software. Budgeting is much more than that. The word budgeting is derived from the Latin words because (a allowance), and praesidium (a measure). Essentially, a budget is an arrangement for the allocation of resources to meet a specific purpose. In its most common use, the term budgeting has to refer to a systematic method of budgeting, however it is also used to indicate the process of coming up with a budget, and making a financial analysis of that budget.
What is involved in budgeting? Basically, the budget deals with the allocation of resources in relation to a specific goal. A typical budget deals with expenses and revenues in a year, month or week. The goal of a budget is to provide financial stability for the organization. For this reason, a good budget is one that takes into account current and future needs and examines the means by which those needs could be met. This detailed understanding allows budgeting to take into account both the short-term and long-term results of a program.
So what do you mean by “a budget?” To answer that question, let’s look at some of the standard kinds of budgets. You would likely see a budget for a business in the annual budget or the quarterly budget. You also might see a budget for a family in the every three months budget or the six monthly budget. Regardless of the type of budget you look at, what is involved is an analysis of what a company needs to do in order to achieve their short-term and long-term goals.
Most budgets deal with mandatory expenditures that must be met on a monthly basis, such as salaries and employee benefits, equipment, supplies, etc. While many budgets will outline spending for these items, most do not list discretionary spending, such as entertainment, travel, lunches out, etc. discretionary spending is time-consuming and often, the subject of controversy between management and employees. For example, while most businesses will want their personnel to travel once or twice a year to meet with management and discuss projects and issues facing the company, some employees (such as those who work on a commission basis) may not feel entitled to such travel, especially if it takes them away from their families.
Implementation of a budgeting process that puts discretionary spending into the model is called “banking,” and is the simplest type of budgeting. Bankprincetonian budgets are designed to guide individuals or small groups toward specific activities over time, rather than having the “activity-based” budgeting methods discussed earlier. These types of budgets are not as detailed as those based on every three months or every six months; however, they can be effective when used as a guide. Some banks create a baseline for their customers’ spending habits at the start of the term, and monitor their progress toward this goal over time using bankprincetonian methods (e.g., monthly statements and comparison to the target range).
As you can see, there are many ways to approach the issue of budgeting. When you are creating a business plan or a budget, consider using one or more of these budgeting models. However, be sure to set spending and activity limits for your purposes. Be sure that any personal decisions you make do not contradict your financial plans! By following these simple steps, you can improve your understanding of how to create, implement, and maintain effective financial plans for your organization.