1.1 Introduction to the Budget Process
Definition:
Budget / 1 n . estimate or plan of expenditure in relation to income; periodic (esp. annual) estimate of an organisation's revenue and expenditure; amount of money needed or available. 2. Allot or allow for in the budget (As per the Oxford Dictionary of Current English , 2000: 17 th edition)
Why budget?
Suppose you were driving to a place that you had not been to before. Would you just drive off without looking at the map, hoping to pick up a sign on the way? If you did, you would need a lot of luck to get to the right place. Even if you did get to the right place, you would probably waste a lot of time and effort in the process. The sensible thing to do is to check the map and plan your journey. The need for planning is all the much more important in any business or financial situation.
A budget is a financial map or plan, written in terms of money or numbers. It is used to prepare an organisation for the future. It provides answers to questions like:
- What financial situation do we want to be in at the end of the year?
- How much do we expect to spend to get there?
- How are we tracking at the moment?
- How many of our goods/services do we need to sell to get there?
Income and expenditure
There are two key elements to a budget:
- Income
- Expenditure
One aim of a budget is to assists us in ensuring that our expenditure does not exceed our income. This can be best demonstrated if we look at the household budget. The income side is fairly straightforward: your average weekly, fortnightly or monthly earnings. However, we know too well that the expenditure side is more complicated.
Activity 1
Complete the following tasks relating to the preparation of a household budget.
- On the Worksheet below, list as many items of expenditure that will have to be paid in the next six months (The first one, food, is done for you).
- Put a dollar value in each month for the expenses that you have thought of.
- Add any additional expenses that you can think of to your budget.
Note: In preparing a household budget you would have remembered things like groceries, electricity, gas, telephone, petrol and public transport costs, rent or mortgage payments. Did you put in a figure for clothing? Are there any work expenses such as tools? Does the car need a major service? Are there any repairs on the house that need to be done? Maybe you will be replacing a fridge or washing machine. And what about the cost of entertainment? All of these things and more have to be thought of so that you can get an accurate budget.
- For each month, add up your total expenditure.
- In the Income row, write in your average monthly earnings.
- Subtract (2) Total Expenses from (1) Total Income.
- Write the result for each month in the Surplus/Deficit row.
Note : If you've got a deficit, or negative number, put brackets around it. This is standard accounting practice. For example: minus$185 is written ($185)
HOUSEHOLD BUDGET
Month
JAN
FEB
MAR
APR
MAY
JUN
Income Salary
Income other
1 Total Income
Expenses
Food
{etc.}
2 Total Expenses
1-2 Surplus /Deficit
Review your Budget
- After completing your budget consider the following points:
- How are you going? Is your budget generally in debit or in credit?
- Is there any particularly difficult month?
- At the end of the six-month period, will you be in debt, or in credit?
- What action could you take to improve your budget situation?
Previous Page