What is a budget?

SOmeone once define it this way: 'A statement of a financial position for a definite period of time, based on estimates of expenditure and proposals for financing them'. That sounds a bit grand, but it's really quite simple idea.

Although a budget can be prepared for almost everything, in business it is generally used to forecast and monitor the business for the year ahead.

The budget is a plan expressed in quantitative terms. Sales are forecast as a number of units sold and the revenue earned is then calculated. The expenses relating to that level of sales must also be calculated. Deduction will be included for overhead expenses which will not be affected by the level of activity. Allowing for all these factors you can then estimate the profit that the business will earn in the coming year. You can also estimate the state of the business finance at the end of the coming year.

Note: although we are primarily involved in financial budgeting, resources 9labour or machine hours etc) can also be budgeted for.