What is Budget and How to Prepare A Budget

A budget is a plan to match your income and expenses.

To spend, you need money. Even if you have money, you cannot spend it in a haphazard manner. You can spend only what you have. To meet your expenses within the money you have, you need to plan what to spend and what to avoid or postpone. So, you need to make a list of all your needs and calculate whether you can meet them all within your available funds.

I hope you prepare lists before going for your monthly purchases.

This list itself is a kind of budget for you. 

Whenever you receive your monthly salary, you will be bifurcating the money into parts. A part is for the rent, one for the groceries, one for education, one for other maintenance expenses, and the like.

And, while preparing the groceries list, you must have a rough idea of the cost of each item. You may not put down the amount on paper. But you will be assessing the total amount that you may require for that purchase. When you notice the total amount is much higher, you may try to lower the quantities or omit some items from the list to match the total expenditure with your available funds for that shopping. Or, on the other hand, you may increase the fund for that shopping if you do not feel like cutting items. 

This entire process is known as budgeting your expenses to your income.

Definition of Budget:

Budgeting means preparing a projection of expenses in monetary terms to be met during a particular period of time or for a particular job or project, against available or expected income during that period.

Preparation of Budgets

A budget can be prepared in a simple way by listing your available income at the top of the list, then listing all your expenses in value, and finally matching the total expenditure with your income. You may try to save some money, or you may match the total expenditure exactly with your income by increasing or decreasing the expenses.

But in the case of big businesses and corporate budgets, it requires a lot of exercise. You will have to plan your production revenue, calculate your income more accurately, and also predict all the expenses you may have to meet during that period as safely as you can.

You can put your income calculations on one side and expenditure on the other side of your statement or calculate them on two different pages and attach them.

You can prepare your budget process-wise if your business deals with different processes and then club them together to know the total impact. 

The budget papers can resemble your Profit and Loss Statement in such cases, with in-depth details of projections in attached statements.

Different Types of Budgets

• Personal Budgets are prepared for one's own expenses or their family.
• Business or Corporate Budget is prepared to project and meet the company's expenses against its available funds and to run it efficiently. 
• Government Budgets are required for efficient management of government funds in the interests of the public and the country.
• Short-term budgets like monthly, yearly, or for a particular purpose or job are prepared to meet those particular short-term purposes.
• Long-term budgets can be prepared for full lifetime planning of individuals or for long-term goals of companies.
• Revenue Budgets are prepared by institutions to plan revenue (receipts), expenses, and income.
• A capital budget is prepared for the procurement of capital goods and assets, like buildings, land, machinery, and the erection of projects, etc.

Personal Budget of a Family

Here is an example of a family's personal budget. 

Let us suppose that a single person is the sole earner, and it is a family of 4 members, with two children attending school. The income from salary is Rs 1,20,000 per month.

Their monthly budget will be as follows:

Income                    1,20,000

Less: 

Rent                           30,000

Power & Gas               4,000

Maintenance              15,000 (water, maid, society charges)

Groceries                   10,000

School Fees               20,000

Books & Stationery    3,000 (average of 12 months)

Clothes                       3,000 (average of one year for whole family)

Transportation            5,000 (for school and office)

Other expenses         10,000 (includes internet, entertainment)

Total expenses       1,00,000 

This is a positive way to plan your budget to cover all expenses and still save Rs 20,000 for emergency expenses.