Last Updated on July 12, 2020
Budgeting is a process whereby individuals, companies, or the government formulates a plan on how to implement its expenditure. The expenditure plan, in this case, is the budget. A budget helps to determine whether your expenses can be comfortably balanced with your income.
If your income and expenses don’t balance, then you are likely to be either in a problem or doing well. When your expenditure supersedes income, you are likely to get into debt to cover the extra costs. Sinking deeper into debts is not such a prudent idea.
Whereas, if your income is more significant than your expenses, then you are likely to make savings with the extra money on top. It is advisable to always pay yourself a coin first, before paying up those expenses. This means, for any money you receive, you have to plan on saving some percentage of it.
Money is a limited resource. Therefore, planning and prioritizing your purchases and spending would help a long way from getting into debt.
Importance of budgeting
First and foremost, budgeting helps keep you out of debt. It is a plan that stipulates what your spending areas and the money apportioned to these areas are. By so doing, you are certain you will not spend more on items not budgeted for and hence avoid debts to supplement the shortage.
Also, budgeting helps in ensuring that you have enough money for the things you need. For instance, if you are running a business, then you are likely to plan for a wage fund. So that when the time comes, you need to pay your employees, you will have the money to do so.
For a small organization, a budget serves as a tool and a guideline at the same time, it serves as a tool in such a way that the organization can use it as part of the documentation in a credit application. For a company to be able to get low-interest loan rates from a licensed lender based in Singapore, they need to present their detailed plan of spending, their expenditure and income documents, this helps the lender to evaluate the company’s eligibility based on planning and execution of those plans.
Moreover, budget statements are also used as company guidelines. Companies try to balance expenditure and revenue for them to realize profits. Nothing keeps them well in check about spending than the budget.
A budget for the government is vital, in that it helps to know how much is available and how much is required to run its operations as well as do development projects for its citizens.
Lastly, a budget informs you of a shortage. Companies and governments are at liberty to use this information early to source more funds to run their operations. Money sourcing could be from borrowing, selling of securities, putting up stocks on sell or initiating contributions if it was a partnership business you were running.
Sources of information or budgeting purposes
- Previous year’s budget statements
Budget statements for each succeeding year are used for comparison purposes as well as obtaining information on the practicability, and the feasibility of the budget presented the next year. It is also used as a guide in preparing a new budget. Those areas which were not worked upon are adjusted so that the new budget is better and more easily implemented than the last one.
- Internal sources
Institution’s internal sources include the manager. The organization’s board presents a target goal to the manager who, in turn, communicates with the company staff who are tasked at implementing that objective. Plans need funding, so the manager would be in an excellent position to know what the company wants and how those goals will be realized, including how to finance them.
- Requirements of clients
The customer is the boss. Companies will have to implement plans which reflect the needs of their customers. And hence allocate substantial funding to this department in the budget.
To better address their clients’ needs, market demands, and industry dynamics, companies need to use all necessary techniques in carrying out research, which will give a clear picture of where investment will be channeled to, to enable smooth operations.
- Sale estimations
There are many methods and techniques a company can use to estimate the expected sales in a given period, such purposes are the linear regression and EOQ, which is used to forecast the optimum inventory levels.
- External market environment
External market sources include inflation estimates – which seek to address the need to include them in the budget for the foreseeable future, exchange rates – importation and exportation trade involves dealing with foreign currencies. Therefore, it is essential to include the expected deviations in the exchange rates in the budget as a contingency. Furthermore, competition levels and economic analysis are some of the sources of budget information.
Every individual must be tax compliant; it makes sense that you should give back to your society. For companies, tax projections are used as a source of information to include in an expenditure plan.
Learning how to budget
- Online. You can learn how to budget by following tips online. Also, there is software that you can download on your smartphone that could teach you how to create a reasonable budget.
- Banks. You can learn how to create an expenditure plan from your lender. You will be taken through the steps on how you can manage to finance and one way being budgeting.
- Financial consultants. You can consult your financial advisor on how to better manage your financing by budgeting.
- Saccos. If you are a member of any Sacco or any saving group, you can benefit from their free lessons to members on how to budget and save.
- Social media. Having realized a significant amount of advancement technologically, nowadays, anything is possible on social media.
- Print media. Most of the prints do include a business section; you can get a detailed explanation of how best you can plan your expenditure.
You need to learn how to budget by first going through the basics. It is impossible to spend responsibly if you do not have a budget. So, after discovering the purpose of creating budget statements, you can now start drawing your own expenditure plan.
Furthermore, you should have an income ready for you to start budgeting, you cannot plan for the money you haven’t received yet, for this is a recipe for debts.