Accounting terms

Dictionary of all accounting terms

What is a Budget?

A budget is a set of plans focused on present and future revenues and expenses. The goal of a budget is to plan spending and often to save money.

The business budget will express its plans in monetary amounts which will help the company carry out its objectives and strategies.

Company budgets being prepared for the following accounting year will usually be broken up by quarter or even month. Although business aim to stick to their given budgets, most good managers understand that budgets are guidelines and often require adjustment.

There are different types of budgets. They include:

Fixed or Static budgets

This type of budget does not change when any business activity, such as sales, increases or decreases.

For example, a company pays a 7% commission on sales. If they project $100,000 in sales, its commission budget will be fixed at $7,000. If the sales exceed expectations by going to $150,000 or disappoint by coming in at $95,000, the commission budget will remain fixed at $7,000.

Flexible budgets

This is the opposite of a static budget. It changes according to changes in the volume of sales.

For example, using the same numbers from before. If the sales end up being $150,000, the commission budget will also increase to $10,500. If the sales are only $95,000, the commission budget will go down to $6,650.

Rolling budgets

This is a type of budget that continually extends its scope by dropping the previous month and adding one more month to its end date. It is also known as a continuous, perpetual, or horizon budget.

For example, let's say a company sets its budget from June 1, 2016, to May 31, 2017. When June 2016 is finished, the company drops that month and extends its budget until June 30, 2017. The period of the budget is still one year, but it cuts and extends the start and end date.

The benefit for this is that the company will always have a budget for one full year.

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