Budgeting Methods: A Comprehensive Guide for Businesses & Individuals

Budgeting can be categorized in a variety of ways. Businesses have different budgets for various departments within the company, and there are different budgeting methods that can be used for each type. Personal budgets can come in various forms as well. Certain types of budgets work better in specific situations. In general, choosing the type of budget to use is a matter of personal preference.

Function

Budgets help businesses and families keep track of their finances. They help to allocate funds to various areas where they are needed, and help keep spending under control. Budgets can allow businesses 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, and each has several sub-types. An operating budget outlines the total operating expenses and income for the organization, 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 organization, 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 practiced 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.

Benefits

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.

Warning

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.