We explain what the budget is and why it is so important. In addition, elements, characteristics, and real examples.
What is the budget?
A budget is a document that details the expenses and profits that an organization, company, or entity (private or State) is expected to have in a given period.
The preparation and execution of a budget have four steps or requirements: its practice, approval by the corresponding individuals or organizations, performance, and control. State budgets are regulated by law.
The central objective of a budget is to control purchases and sales and quantify the income and expenditure of money. In addition, it aims to prevent and correct errors and carry out the financial controls of the entity or organization. The budget allows you to keep track of priorities and pursue goals.
Types of budgets
Budgets are classified based on different criteria:
Depending on the time:
Short-term budgets. They cover a period that does not exceed one year.
Long-term budgets. They cover a period greater than one year; large companies and states use them.
According to flexibility:
Flexible budgets. They allow modifications according to the circumstances that may occur.
Rigid budgets. They do not allow modifications despite the changes that may occur.
According to the economic sector:
Public sector budgets. They are carried out within entities or agencies dependent on the State. They include all those expenses and investments that derive from general management.
Private sector budgets. They are carried out in companies or organizations that do not depend on the State but are in private hands.
According to the area within the organization:
Main budgets. They are considered the budgets of all areas within the organization and include auxiliary budgets.
Auxiliary budgets. They are carried out based on a specific area within the organization.
Importance of the budget
The budget is a fundamental piece in any organization with money inflows and outflows since it allows operations to be planned to meet the proposed objectives.
It is done in advance to determine and organize the amount of money or resources expected to be available in a period (usually a year). Having this control allows, among other things:
- Control income and expenses.
- Measure the risk and reduce it.
- Review the tactics and policies taken by the agencies.
- Carry out financial control.
- Set goals and objectives based on the available budget.
elements of a budget
When planning and making a budget, certain elements must be clear:
- Means. Everything necessary to achieve the objectives is taken into account.
- Context. The social, political, and economic framework in which the activity will take place is analyzed.
- Goal. The goals to be pursued are defined.
- Plan. How the goals will be achieved is defined.
- Operations. The income that is expected to be obtained is detailed, as well as the expenses.
- Human Resources. All individuals representing the different areas of the organization are involved.
Characteristics of a budget
The main features of any budget are:
- It is regular. It is done in specific periods.
- It is comprehensive. It takes into account all sectors and areas of the organization.
- It is predictive. It seeks to foresee and organize a future period.
- It is quantitative. Use a monetary unit to represent the action plan.
- It is goal-oriented. Seek the realization of general or particular purposes.
- It is detailed. It includes all the information necessary for the description of situations.
- It’s realistic. Make projections based on specific and reliable data.