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What is Budget?

Budget

A budget is a financial plan that outlines an individual’s, organization’s, or government’s expected income and expenditures over a specified period of time. It serves as a tool for managing finances, ensuring that resources are allocated effectively, and financial goals are achieved. Budgets help in planning, controlling, and monitoring financial performance.

Type of Budget

Operational

Description: Details the expected revenue and expenses associated with the day-to-day operations of an organization.

Components: Sales revenue, production costs, administrative expenses, and overheads.

Purpose: To ensure that the organization can cover its operating expenses and achieve profitability.

Capital

Description: Plans for investments in long-term assets such as property, machinery, and infrastructure.
Components: Expenditures for fixed assets, investment analysis, and funding sources.
Purpose: To allocate resources for major capital projects and ensure that investments align with strategic goals.

Cash Flow

Description: Estimates the inflows and outflows of cash over a specific period.

Components: Cash receipts, cash disbursements, and net cash flow.

Purpose: To ensure that the organization has sufficient cash to meet its obligations and avoid liquidity issues.

Financial Budget

Description: Combines various aspects of the operating, capital, and cash flow budgets to present an overall financial plan.
Components: Income statement, balance sheet, and cash flow statement.

Purpose: To provide a comprehensive overview of the organization’s financial health and guide strategic decision-making.

Static

Description: A fixed budget that does not change regardless of variations in actual activity levels.

Components: Pre-determined income and expenses.

Purpose: To provide a baseline for comparison and control.

Flexible

Description: Adjusts based on changes in actual activity levels or volume.
Components: Variable costs that change with activity levels, and fixed costs that remain constant.
Purpose: To provide a more accurate reflection of costs and revenues under different scenarios.

Zero-based

Description: Requires each expense to be justified for each new period, starting from a “zero base.”
Components: Detailed justification for all expenses.
Purpose: To eliminate unnecessary spending and ensure efficient allocation of resources.

Program Budget

Description: Allocates funds to specific programs or projects within an organization.
Components: Program objectives, costs, and expected outcomes.
Purpose: To focus on the financial aspects of achieving specific organizational goals.

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