Budget: what it is, its characteristics and examples

We explain what a budget is, what it is used for and why it is important. We also explain what the public budget is and more.

A budget allows you to calculate the cost of all the resources you need.

What is a budget?

A budget is a detailed plan that estimates, in advance, the expenses that a project or business will require in a given period of time. It is a tool that allows you to estimate the amount of money and resources that will be needed to achieve a particular goal.

Etymology: The word budget It comes from the Latin prae, which means “before” and I suppose, that It means “suppose” and refers to “anticipate” or “estimate something in the future.”

A budget allows you to manage current finances, reduce uncertainty due to market volatility and influence decision-making to meet goals and objectives in the short or long term, whether in the individual, family, work or state economy.

• For example:To budget a trip, you must calculate the cost of airfare, taxis or trains for internal transportation, lodging, food, among other expenses. Once the complete budget is made, you will know how much money is needed to make the trip and, if you need to save, you can set a specific date to make the trip.

  In the case of a company, the budget is usually more complex: it is organized by areas of work and time periods or by a particular project. In the business environment, the budget is part of a company’s balance sheet, a longer document containing financial information about the company.

What is a budget for?

Below we detail the most common uses for all types of budget:

• It allows you to calculate the money that needs to be spent or invested in a given period of time.
• It is used to determine whether it will be necessary to save money, apply for a loan, or design the project in stages.
• Establish financial control to anticipate possible debts.
• It is used to estimate a projection of the business or project.
• It is used to control the finances of a large company and avoid money diversions.

What is the importance of a budget?

A budget is a calculation made in advance that allows you to optimize your money and foresee possible problems. It is an estimated projection that can vary over time but, nevertheless, provides a fairly accurate view of the future. It is a versatile tool that can contain various data and adapt to different needs or areas.

Some areas where it is useful to prepare a budget are:

• To calculate the family group’s expenses for the next month. It is necessary to take as a reference the expenses of last month, such as taxes, rent, food, health services, school supplies, clothing, utilities, among many other expenses.
• To calculate the costs of a production. It is necessary to calculate the costs of raw materials, supplies, labor, rental or purchase of machinery, logistics, taxes and any other expenses. Depending on the economy of each country, other extra expenses that may arise after the budget has been created can be projected, such as the percentage of price increases due to inflation or tax burdens due to new legislation.
• To calculate the administrative expenses of a company. It is necessary to calculate the expenses required to start the company, such as rent, machinery, salaries and social security contributions, public services and taxes, accounting services, among other fixed expenses.

Public budget

The public budget is a financial document with the character of national law that is declared each year and in which the income that the State will collect is planned according to the priorities and socioeconomic needs of the population and the nation, destined for the provincial and municipal states of the entire nation. The budget process is carried out between the executive, legislative and judicial branches.

The public budget estimates the financing necessary for the operation of the State in its entirety for the next year, and covers various areas, such as health, transportation, education and culture, national security and social security.

Example of a budget

The monthly budget of a typical family is a useful tool to calculate the month’s expenses and, also, to determine whether you can allocate part of the income to savings or determine what monthly expenses you can reduce in order to save.

Below is a detail of the monthly expenses that a family must face:

Type of expenseCost in US dollars (USD)Rent250Housing and vehicle taxes180Electricity100Water50Gas70Internet and mobile telephony65TV subscriptions and platforms30Food and drinks300Cleaning products80Personal hygiene products25Transportation500Fuel350Vehicle policy15Vehicle maintenance50School fee210English course fee22School supplies15Clothes and accessories105Family outings45Unforeseen expenses200Total expenses for the monthUSD 2662

Importance of a budget

A budget allows you to plan, foresee expenses and secure finances in different areas: at home, in a business, in a company or in the State. Sometimes, it is not enough to have enough money; it is important to know how to manage it. Designing a budget allows you to organize and manage money to reduce uncertainty about the near or distant future.

• For example: In the event of an economic crisis and inflation in the country, even if there is enough money available at present, the currency will be worth less and less. Planning a monthly budget that takes into account the percentage of price increases due to inflation allows you to better manage your money over a period of time.

The budget includes required, predictable and unforeseen expenses and the possibility of savings, among other variables. It is part of an accounting plan: a record of all the financial activity of a business or company, including the receipts and expenditures of money in a given period of time. In addition, it includes an estimate of possible profits and expenses to design a business projection.

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References

• MacNeil, C. (2022). How to create and meet a project budget? from: Asana
• BBVA, (2022). What is a budget and how to prepare one based on objectives and goals? from: BBVA
• Rodríguez, J. (2022). The 8 types of budgets, their characteristics and examplesfrom: Hubspot