Definition: Budget surplus refers to the amount by which a company’s revenue exceeds its expenses. In other words, it measures how much money the company has left over after paying all of its expenses.
This term is most commonly used to refer to government spending, but it can also be applied to companies and individuals. Typically when talking about individuals, you would use the term net savings. Likewise, companies typically call their surpluses free cash flow.
Either way, this is a very important metric for all businesses because it shows the company is running efficiently and it has money left over after paying its expenses, which it can be used to invest, grow, or pay their shareholders. However, a budget surplus can only occur as the result of either increasing revenues, or lowering of expenses. If companies continually have a budget surplus, or profit, this signals to investors that the company is strong, and will further increase investment and growth in the company.
Let’s look at an example.
Jessica is the head of a new design firm in San Francisco, and she wants to begin investing in new product lines. However, she needs money in order to do that, so she takes a look at her company’s financials. She sees that the company has revenue of $10,000 with costs of $12,000. So far, the company has been staying in business due to Jessica’s contributions from her personal accounts. However, she talks to her managers and sees they can lower costs to $9,000. At the end of the following year, she checks her financials, and sees that the company has grown revenues to $15,000 and decreased costs to $6,000.
This gives the company a budget surplus for the year of $9,000. Since this is the money her company has after paying all of its expenses, Jessica can use this money to invest in new product lines. She spends $6,000 on new design items, $2,000 on marketing, and $1,000 to set up a show to display her work. The show is a success, and investors flock to her business. Soon, it is enjoying over $25,000 in revenue each year, with costs of only $10,000.
Budget surplus is an important part of a business in order to facilitate growth and investment, which in turn can lead for new successes in the future. Continual budget surpluses, or profits, are recorded as Retained Earnings on the Balance Sheet, and are a key source of financing for the company.
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