Budgeting can be categorised in many different ways. Businesses have different budgets for different departments within the company, and there are different budgeting methods that can be used for each type. Personal budgets can come in different forms as well. In some cases, certain types of budgets work better in specific situations. In general, choosing the type of budget to use is a matter of personal preference.
Budgets help businesses and families keep track of their finances. Budgets help to allocate funds to various areas where they are needed, and help to keep spending under control. Budgets can allow a business to predict the financial outcome for a period of time if they undertake a certain project or plan, which can aid in decision making.
Business Budget Types
There are three primary types of budgets that businesses use. Within these three primary types, there are many different subtypes. An operating budget outlines the total operating expenses and income for the organisation, typically for the period of a fiscal year. Capital budgets evaluate the investments and assets of the business, and a cash budget shows the predicted cash flow in and out of the business over a period of time.
In addition to these main types, budgets may be created specifically for special events, for the recruitment and retention of new staff, and to manage the advertising expenses and return on investment for the business. Budgets can be created for any specific purpose within an organisation, so the possible types of budgets are limitless.
Personal Budget Types
Personal and family budgets generally track the income and expenses of the family or individual. Envelope budgeting is a technique that has been practised for many years; it involves creating an envelope for each recurring expense. A certain portion of money is set aside in each envelope with each paycheck, and at the end of the month, enough money will be set aside to cover each expense.
The most common method of personal budgeting is the spreadsheet method, where each expense is given a line on a standard spreadsheet and there's a line at the top for the total anticipated income for each month. The expenses are subtracted from the total expected income, and whatever is left can be allocated toward paying down debt or savings. This method can also be used in reverse, when the total expenses are calculated and then used to determine how much income the family must generate.
Budgeting is a valuable tool for a business. Companies use budgets to gauge their financial performance throughout the year and adjust spending to ensure a certain amount of profit can be maintained. Personal and family budgets are useful in helping families learn money management and plan to get out of debt.
Budgets are only useful tools as long as they are followed and used to make necessary adjustments. If a budget is created and then placed aside, it can't help a family or business manage finances. A family who has created a budget and then spends excessively on entertainment may still not have enough funds left to meet their financial obligations, despite careful budgeting. For a budget to be a valuable resource, it must be followed as closely as possible.