What is a Budget?

A budget is a quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms.

Etymology of Budget

A budget (derived from old French word bougette, purse) is a quantified financial plan for a forthcoming accounting period.

A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.

Purpose of Budget

Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include:

    To control resources
    To communicate plans to various responsibility center managers.
    To motivate managers to strive to achieve budget goals.
    To evaluate the performance of managers
    To provide visibility into the company's performance
    For accountability

In summary, the purpose of budgeting is tools:

    Tools provide a forecast of revenues and expenditures, that is, construct a model of how a business might perform financially if certain strategies, events and plans are carried out.
    Tools enable the actual financial operation of the business to be measured against the forecast.
    Lastly, tools establish the cost constraint for a project, program, or operation.


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