Definition: A budget is a formal statement of estimated income and expenses based on future plans and objectives. In other words, a budget is a document that management makes to estimate the revenues and expenses for an upcoming period based on their goals for the business.
What Does Budget Mean?
There are tons of different kinds of budgets from short-term and long-term to department specific. Management can make a budget for anything. The important thing to remember is these budgets are really just the management’s future goals and plans for the business written down in financial form.
For instance, if management were planning to purchase a new piece of equipment next year, that expense would show up in the budget. See what I mean? It’s just a written plan that details the financial goals of the company for a future period.
Short-term budgets typically only cover a one-year span of time or less. The estimated revenues and expenses are set at the beginning of the year and the actual numbers are evaluated later in the period to see if they “met the budget.”
Long-term budgets cover time periods of one-year or more and are usually are quite general. Since it’s difficult enough to estimate production expenses and sales volumes in the current period, it’s even more difficult for years into the future. Instead, long-term budgets general tend to focus on large investments and broad company goals.
Other budgets are created to track job performance during a period. For example, the sales budget is used to track sales growth during a period and gauge the how successfully new goals are met. The cash budget tracks the amount of cash spent and taken in during a period and compares it with the goals for that time frame.
At the end of each period, the current budget numbers and actual performance numbers are compared and adjustments are made if needed.