Budgeting is the systematic organization of income and expenditures over time. Budgeting is an essential part of the financial activity of governments, businesses, households, and individuals. Businesses, households, and individuals benefit from the systematic organization of income and expenditures over time. The systematic organization of income and expenditures over time helps businesses, households, and individuals to use their money more efficiently. The more efficient use of money allows for financial goals to be met. Money that is not wasted on frivolities or misallocated to fruitless projects can be used to meet financial goals.
What is Budgeting?
Budgeting is the process of organizing the use of money over time. The organized use of money over time is crucial for the financial health of governments, businesses, households, and individuals. The financial health of businesses, households, and individuals depends upon the degree to which the use of money over time is organized. The organization of the use of money over time improves the efficiency with which money is used. Improvement in the efficiency with which money is used conduces to the fulfillment of financial goals. Thus, budgeting leads to the fulfillment of financial goals.
Why is Budgeting Important?
Budgeting is important because of the financial goals that every entity has, from governments to businesses, down through the household to the individual. Budgeting organizes the use of available funds over time. The organization that budgeting provides is directed toward a particular end. The particular end to which the organization that budgeting provides is directed is the financial benefit of the entity for whom the budget is prepared. The financial benefit of the entity for whom the budget is prepared is the financial goals that provide the greatest impetus to the good life for that entity. The good life is the end toward which budgeting organizes the financial affairs of entities.
What are the Benefits of Budgeting?
The following lists the benefits of budgeting.
- The benefits of budgeting are the organization that budgeting provides to the income and expenditures of governments, businesses, households, and individuals.
- Budgeting organizes the income and expenditures in which entities engage over time.
- The benefits of budgeting may be understood by imagining a world in which budgeting is absent.
- A world from which budgeting is absent would be a world characterized by the fulfillment of goals with only extremely short or extremely long time preferences.
- No long-term planning would be possible in a world in which budgeting is absent.
- In a world in which budgeting is absent, money would either be spent frivolously on immediate pleasures of the flesh or would be hoarded with a view toward undefined threats and catastrophes.
- The hoarders would ultimately enter into conflict with the profligate, resulting in societal disorder and strife.
- Budgeting puts short-time-preference goals and long-time-preference goals into a state of balance and harmonic action.
How do you Make a Budget?
The following list demonstrates how to make a budget.
- First, define your financial goals.
- Second, calculate your income over time.
- Third, determine your necessary expenditures over time.
- Fourth, determine your unnecessary expenditures.
- Fifth, make a plan to eliminate your unnecessary expenditures and limit your necessary expenditures.
- Finally, make a plan to save or invest excess income with a view toward meeting your long-term financial goals.
How does Budgeting Work for Companies?
Budgeting works for companies by organizing their income and expenditures over time. The organization of companies’ income and expenditures bridges the gap between day-to-day spending and long-term goals. Bridging the gap between day-to-day spending and long-term goals allows for money to be used in projects that benefit the financial health of companies. Projects that benefit the financial health of companies include things like research and development and expansion. Research and development and expansion are enabled by good budgeting techniques and discipline.
What are the Types of Budgeting Methods?
The following table lists some common budgeting methods.
|Value proposition budgeting
|Makes small changes to existing budgets
|Focuses on lowering costs
|Reconsiders an entity’s entire budget at the beginning of each financial reporting period
|Considers every budget item with a view toward how it meets the entity’s financial goals
|Estimates certain costs within a range of possibilities
|The simplest budgeting method
|Involves more analysis than incremental budgeting
|Contrasts directly with incremental budgeting
|Adopts a different analytical perspective from activity-based budgeting
|Allows for adaptation to new circumstances
1. Incremental Budgeting
Incremental budgeting prepares budgets on the basis of previous budgets. Previous budgets are taken as the basis for budgeting activity when using the incremental budgeting model. The incremental budgeting model is simple in comparison to other budgeting methods. The simplicity of the incremental budgeting model in comparison to other budgeting methods is offset by the potential for greater inefficiency. Greater inefficiency may be introduced when using the incremental budgeting method because comparatively little attention is given to the fact that circumstances change, and that “everything is constant flux (τὰ πάντα ρεῖ)”, as Heraclitus of Ephesus once wrote.
2. Activity-based Budgeting
Activity-based budgeting considers individual budget items from the perspective of the activity that individual budget costs serve. The activity-based budget attempts to make the expenditures of companies more efficient. Manufacturing companies use activity-based budgets to determine how much money is needed to produce an individual product. Identifying the costs that go into the production of products allows for companies’ processes to be brought to the extreme limit of efficiency. When a company’s processes are brought to the extreme limit of efficiency, its profits will improve. The improved profit that activity-based budgeting promises will be offset by the expense required to implement activity-based budgeting, which is due to its exacting and painstaking character.
3. Zero-based Budgeting
Zero-based budgeting reconsiders an entity’s entire budget anew at the beginning of each financial cycle. The incessant fluctuation that circumstances undergo has the effect of rendering certain expenditures obsolete. The obsolescence of certain expenditures results in the introduction of inefficiencies with entropic regularity. The inefficiencies introduced by the chaos inherent in the imperfect and constantly-decaying order of creation affect the profits that companies bring in, making it difficult to fulfill financial goals using only the method of incremental budgeting. The labor and expense involved in beginning your entity’s budget from scratch with the start of each cycle bear the fruit of augmented efficiency.
4. Value Proposition Budgeting
Value proposition budgeting considers expenditures with a view toward your entity’s financial goals. Value proposition asks of every expenditure, “what is the purpose of this expenditure? Is this expenditure fulfilling its purpose?” The perspective offered by value proposition budgeting enables inefficiencies to be eliminated with ruthless determination. The elimination of any expenditure that cannot demonstrate its value to the whole will allow for your entity to be streamlined into a sleek killing machine, where killing refers to profitability and competitive edge. The profitability and competitive edge that value proposition budgeting provides come with a cost, however, especially in relation to methods like incremental budgeting.
5. Flexible Budgeting
Flexible budgeting recognizes the uncertainty inherent in attempts to foresee the future of your business entity. The future of your business entity may bring new opportunities or catastrophic losses brought on by unanticipated disasters. The new opportunities and catastrophic disasters that the future may hold mean that your entity’s expenditures will likely cover a range of costs, rather than a fixed sum. The range of costs that your business entity may incur is estimated by the method of flexible budgeting. The guesswork that flexible budgeting entails may be strengthened using statistical techniques based on previous data.
How Long does Budgeting Take?
Budgeting takes time. The amount of time that budgeting takes varies depending on the budgeting method used. Simpler budgeting methods take less time. An example of a simple budgeting method is the incremental budgeting method. More complex budgeting methods take more time. An example of a more complex budgeting method is the method of activity-based budgeting.
Is Budgeting Required?
Yes, budgeting is required. Budgeting is required for building bridges between short-time preference goals and long-time preference goals. The bridges that budgeting builds between short-time-preference goals and long-time-preference goals contribute to the stability and prosperity of society. Budgeting is also required in the face of the inexorable entropic decay that it seems all organized entities face. The inexorable entropic decay that all organized entities face can be minimized by means of budgeting. Profit results when the inexorable decay that all organized entities face is minimized.