Our Budget.

Our Budget - Money Matters.

This post is about our budget. A budget is one of the things which helps an individual, a family or an organization to keep financial matters on track. A budget helps to guide monetary transactions properly. An individual can have a personal budget; a family can have a household budget and an organization can have its own organizational budget.

Income is usually limited and expenditures follow it. When expenditures rise, savings get reduced. When savings go down, people suffer. People who prepare a budget and follow it meticulously seldom face such a scenario. The same is true about every business and every organization.

Meaning of Budget.

Budget is a plan to show the amount of money which can be earned and the money which could be spent within a specified period of time - usually a month or a year. In other words, budget is a plan for expenditure which is made by considering available financial resources. Budget focuses on efficient utilization of resources by curbing unnecessary expenditures.

Importance of Budget.

Budget is a tool for financial management. Budget helps people to make financial decisions. Budget is important for individuals as well as for businesses, because it can specifically pinpoint the deficiencies which otherwise go unnoticed. If we know our deficiencies fully, we could plan accordingly to overcome them.

A budget plan helps in solving problems related to money. People who are rich know the importance of budget and usually have their own personal budget. The budget plan should include all components which are essential for it.

Components of Budget.

Budget primarily deals with income and expenditures. These are the two main inputs for a budget plan. However, to make a budget plan complete, savings has to be included in it.

Income, expenditures and savings should form the components of a budget plan. A budget cannot be called complete if any one of these components is lacking as they are interrelated.

(a) Income: This is the first and the most important component in a budget. Income is the engine which drives budget plan. Income could be fixed or variable and it depends on the occupation of the individual. For most people, income is variable. Fixed income is a rare phenomenon as we can see variations even in salary.

While variations in income could be positive or negative, the latter is always a cause for concern. Though, some amount of negative variation is anticipated if it is occasional, but if it happens frequently, it could hamper budget plan. Regular income is a must for making budget. It is the lifeblood of a budget plan. Income has to be utilised economically by curbing wasteful spending.

(b) Expenditures: This is the next component in a budget and usually decides the fate of a budget. Expenditure is the derailing component in a budget which has to be controlled effectively. Budget suffers grave damage when expenditures go uncontrolled. A typical household expenditure may include following things:

• Rent (if any).
• Groceries.
• Medicines (if any).
• Clothing.
• Energy charges (Electricity Bill).
• Fuel charges (Petrol, Diesel or cooking gas etc).
• School or college fees (if any).

(c) Savings: This should be the third component in budget and should be the objective of every budget. Some amount of monthly income has to be saved every month. When we make a provision for savings in our budget, we save reasonably well. Savings looses it's steam quickly and therefore we need a well thought out plan to avoid that.

The Role of Planning.

Planning is the backbone of every budget. While planning, we should consider income and make provision for savings by limiting expenditures to a minimum. This indeed is a tricky task. If not done properly, the plan could fail.

The plan should have well described list of expenditures for a given month. The income should be bifurcated effectively to meet expenditures and savings in such a way that any amount gained through the control of expenses should be positively saved and not spent on anything else.

The plan should effectively satisfy the requirements of savings and that should be the aim of a budget. A budget plan that does not help conserve resources for future can be considered a failed one.

Personal Budget.

A Personal Budget is easy to make. Personal budget involves planning for every month. A personal budget is the simplest form of budget as for most people, the source of income is just one and expenses are more predictable.

Household Budget.

A household budget is similar to a personal budget. Household budget involves the income and expenditures of a family rather than an individual. This budget plan involves adding incomes of all earning members of a family to make it one big total against which the total expenditure plan for the family is prepared. A household budget plan also should have provision for savings.

Budget Plan for Business and Organisations.

Every business should necessarily have a budget plan. Budget plan for business is far more complex as it involves innumerable transactions of earnings and expenses. A business usually deals with large amounts of money and so maintaining records of transactions and planning for budget is a complex process. The complexities increase with the size of the business. The bigger the business, the greater will be the complexities.

A business plan will include three things:

(1) Revenue: Revenue is the income for a business. It is checked and calculated every day, every week, every month and of course, every year. Revenue includes all forms of income for a business: the most important is the sale of products or services. The existence of a business depends upon sales and the income from sales. So, it is important.

(2) Costs: No business can avoid costs. Though, costs can be reduced and should be reduced, it cannot be avoided. Costs are inevitable for a business. Every business spends money to make money. So, it has to be included in a budget plan.

(3) Profit: Every business has one main objective: to make profit. The business should be able to make profit after all costs and taxes. As profit drives a business, its importance is in no way less than the other two.

Why Budget Plan Fails?

A budget plan could fail if it is not properly conceived. Sometimes ideas that seem good may not be implemented practically. Often, so many extra things get added up in budget which we may not have thought of when planning. Most of the time, it is expenditures which shocks people with a surprise.

A budget plan should be implementable and should not remain confined to paper alone. When we make a budget plan and implement it, we come to know about its shortcomings and that's how we learn to make it better in future. A foolproof budget plan is difficult, but not impossible to make.

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The previous post was on Insurance.

The next post is about working capital.

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