There are many types of budgeting, both personal and business. In addition, the different types often overlap. The following listing of the many ways people and business can budget will help anyone in need of good budgeting get lots of great ideas.
What is budgeting?
A budget is essentially just a plan or a plan of action. In this case, it is a plan for money and usually puts it into categories. Depending on the situation, the plan can involve borrowing, investing, spending and other aspects. By writing this plan out, people can get a better idea of where money is coming from and how it is being spent. By doing so, it becomes possible to use it more effectively.
Benefits of budgeting
It is all too easy to spend money, but budgeting installs a kind of financial discipline. By doing so, people can get the most of out their money. With this better use of resources, those who budget can have money on hand to prevent crises, do more and find financial freedom.
In business, a budget is necessary to allocate resources and plan for the future.
Goals of personal budgeting
The primary goals of personal budgeting are as follows:
- Get organized and set goals: Many people live paycheck to paycheck with little organization and fewer goals in their finances. With order, people are much more likely to set and reach goals.
- Analyze income and expenses: The cash flow people imagine they have and reality are often very different. Keeping everything recorded in a budget is a way to keep it real and make better decisions.
- Create a budget: With the hard numbers, it is much easier to find savings and set realistic goals.
- Sticking to it: The biggest problem with budgeting is that most people lose interest or self-discipline too soon. Therefore, everyone needs to find a budgeting system they enjoy and the motivation to stick with it (see the importance of saving money).
The basics of personal budgeting
While individuals use various forms of budgeting, most boils down to a basic spreadsheet type (see budgeting spreadsheets for more details). In this method:
- The spreadsheet is divided into income and expenses with total net pay (or the average) added up on the income side.
- Expenses are tracked and itemized. Common categories include housing, utilities, transportation, debt payments, entertainment and vacations. The more detailed the better for proper analyses.
- Expenses are subtracted from income and the difference, hopefully positive, can be devoted to debt elimination and savings.
- The spending overview the budget provides can be used to examine spending and find places that will offer savings. From here, goals can be set and a plan to reach them created.
The envelope system is one of the most popular methods people use to help them better follow their budgets. In this system, the amount of money that is budgeted in a category such as entertainment is set aside in an envelope marked accordingly. Any money spent on entertainment for that month can only come from that envelope. If there is not enough on hand in any category’s envelope, the activity should be put on hold until the next month or made up with money from another category.
With apps and cloud computing that makes access possible from anywhere, personal budgeting software is more useful than ever and is growing as a method of helping people create and follow budgets.
Some other types of budgets people use include:
Percentage budget: This type of budget assigns a percentage on the amount of income that can be spent in each category. For example, 10% might be savings, 15% entertainment and so on. Those who would only like general spending targets prefer this form of budgeting.
Cash budget: To prevent the impulse buying that can sometimes come with using credit cards and buying on credit, some people keep as much of their spending in cash as possible. This is good for reminding people they are actually spending when they buy things, but it makes spending more difficult to track.
Event budget: For a large enough event, such as a vacation or household move, a special event budget can be created. This helps people make spending decisions on a smaller level and better control what is being spent. In other cases, when people find they are spending too much in a particular category, they may want to break it down into sub-categories for a clearer picture of where their money is going.
Various types of budgeting generally used in business
Most types of budgeting are related to business, although individuals can use these methods in different ways. There are two broad types of business budgets that are important to many organizations: operating and capital budgets.
The operating budget or expense budget is the planned budget for a company over a set period, usually a year. It will give a detailed projection of the expected income and expenses over the year based on sales forecasts and expenses for previous years. Since this budget is focused on operations, it will usually have sub-budgets to include sales and salaries but not capital outlays, since they are a long-term cost. Such items will be included in the overall budget. Operating budgets help allocate funds and determine financial results for the year.
The capital budget is used to help determine a company’s long-term investment strategy. Companies, with their limited resources, use these as a form of investment appraisal to decide on which investments and ventures are worth pursuing. This determination of a project’s worthiness will take into account such factors as its cash inflows and outflows. Some methods of capital budgeting that are frequently used include internal rate of return (IRR), net present value (NPV) and discounted cash flow (DCF).
On an individual level, this can be thought of as people having wish lists of things they want to buy and deciding which ones they will actually purchase.
More types of budgeting
- Incremental budgeting: This takes the figures from the last year’s budget and adds a small amount for inflation or other cost increases. In some cases, it may also reduce the amount allocated.
- Sales budget: This is an estimation of future sales. Generally, it will be broken down both for its monetary amount, and the number of units sold. It is utilized to help companies set sales goals.
- Cash flow budget: Usually for the shorter term, this budget predicts income and expenditures to determine if cash flow will be sufficient. By revealing what is on hand, it is often used to determine if a firm will require outside financing to cover needs or if there is a surplus.
- Marketing budget: With the promotion of a company and its products as important as it is, many firms will create marketing budgets to estimate how much will be needed for advertising and public relations.
- Project budget: Somewhat like an event budget in personal budgeting, a project budget estimates the costs for a particular project. It will frequently be broken down into specific tasks and include labor, materials and any other expenses the project is expected to incur.
- Expense budget: This type of budget is basically for planning where money will be spent. It is concerned more with fixed costs to include labor and utilities over capital costs and the repayment of liabilities.
- Zero-base budgeting (ZBB): This form of budgeting starts with no preconceptions of what costs should be. Therefore, managers must justify all their budget requests from scratch and in detail, although this often starts from a pre-determined, survival level of expenditure. While it helps reduce the chances of expense growth taking on a life of its own as it frequently does with incremental budgeting, it requires more time and paperwork than other types of budgeting.