The basics of budgeting

In this article, we look at the basics of budgeting, how you should go about devising a budget, and why it is essential to keep your business and private budgets separate.

- Janine Ryan

Budgeting is the process of creating a detailed plan that outlines an individual’s or an organisation’s expected income and expenses over a specific period of time, usually for a month, quarter or year. The primary purpose of budgeting is to allocate financial resources effectively, set financial goals, and monitor and control spending to achieve those goals.

ELEMENTS OF A BUDGET 

A budget starts by estimating all sources of income, such as salaries, wages, rental income, investments, or any other form of revenue. This represents the money coming into your business.

Budgeting also involves categorising and estimating all planned expenses or expenditures, including fixed costs, such as rent or mortgage or loan payments, variable costs, such as utilities and transportation, as well as wages, discretionary spending, and savings or investment contributions.

Budgets are created for specific time periods, such as monthly, quarterly or annually. Shorter time frames, like monthly budgets, allow for more frequent tracking and adjustments.

Remember that the estimates used in budgeting are based on historical data, previous spending patterns, market research, and financial goals. It is essential that these estimates are done accurately and honestly in order for you to benefit from the process of budgeting.

Once a budget is in place, it’s crucial to track actual income and expenses regularly. This allows for comparisons with the budgeted amounts, identifies variances, and provides opportunities for adjustments as needed.