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Budgeting is looking at a business’s estimated income. Income is the money that comes into the company from selling products and services, and expenditures are the money that goes out from paying expenses and bills over a significant period shortly. It allows a business to analyze if they will be able to continue operating at their expected level with these assumptions of incomes and expenditures.

A budget is usually drawn up for a financial year and contains information about anticipated sales and associated business costs. By using this budget, a business can visualize how well they are expecting to perform within the year, and their actual performance can be monitored against this original plan.

The Purpose and Objective of Budgeting

The primary purpose of budgeting is to plan different phases of business operations, coordinate activities of various departments, and ensure effective control over them. Accordingly, a budget aims at achieving the following objectives:

  • To predict the firm’s future sales, production cost, and other expenses to earn the desired income and minimize the possibility of losses
  • To anticipate the firm’s future financial condition and need for funds to be employed in the business to keep the firm solvent.
  • To decide the composition of capitalization to ensure the availability of funds at a reasonable cost.
  • To coordinate the efforts of different firm departments toward the common objectives.


What are the three kinds of budget?

Balanced budget
This budget type focuses on a person's spending within one's means. Economists often know this type of budget as an ideal budget. Under this budget, a government should seek to spend only within the slated revenue or receipt for the year. However, due to fluctuations in the economy like inflation, and other unusual external or internal factors, following a balanced budget will make it near impossible for the government not to reach its goals. In theory, implementing this budget isn't easy. Nevertheless, a balanced budget will ensure economic stability and keep government expenditure in check if it is executed correctly. However, on the other hand, it may not solve some recurring problems like unemployment and restricts economic growth.

Surplus budget
In simpler terms, what the government earns in a year, primarily from taxes, import/ export duties, fees, and other revenue, is more than what it spends on the public. As the government has extra financial reserves, it can settle all the outstanding dues and reduce the interest burden and debt. However, reducing debt can cause deflation and affect the market. In addition, if most of the consumers' money goes towards taxes, they will have lesser to spend. Less expenditure can hurt businesses and investments, slowing the economy down. Furthermore, a budget surplus serves well in times of high inflation but can have adverse effects if adopted for an extended time.

Deficit budget
A deficit budget is a budget in which the government's estimated expenditure exceeds that fiscal year's expected revenue/ receipts. In this type of budget, the government spends more than it receives in revenue. As a result, it might have more borrowing and debt. A deficit budget can positively affect developing countries like India if the debt remains limited. However, just as a continued surplus budget carries its cons, so does a continued deficit budget.


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6 Reasons why you need a budget

It helps you keep an eye on the prize
A budget enables you to map out your goals, save money, keep track of your progress, and make your dreams a reality. Okay, it may hurt when you realize that your dream of getting something extra for yourself doesn't fit in your budget. But at that moment, if you remind yourself that you're saving for your future, it will be much easier to hold the thought of unnecessary spending.

It helps you ensure that you don't spend money that you don't have
So many consumers spend money they don't have—and they owe it all to credit cards. The estimated credit card debt per household has reached $6,270 in 2022. Unfortunately, people who overuse their credit cards don't usually realize that they're overspending until they drown in their debt. However, if you set and stick to a budget, you'll never find yourself in this precarious position. Instead, you'll know exactly how much you can afford to spend each month, knowing your earnings, and how to save. Sure, keeping track of a budget isn't fun. But look at it in a way: when others are making an appointment with a debt counsellor this time next year, you'll be moving into your new home.

It Helps Lead to a Happier Retirement
Spending your money responsibly, following your budget to a T, and never carrying credit card debt. Good for you! These terms are essential, "spending your money wisely today" and "saving for your future." It's necessary to add investment contributions to your budget. You'll eventually make a nice nest egg if you set aside a portion of your earnings each month or other retirement funds. Although you may have to sacrifice a bit now, it will be fruitful down the road. 

It Helps You Prepare for Emergencies
Life is filled with surprises. When you become sick or injured, go through a divorce, or have a death in the family, it can lead to severe financial turmoil. Of course, these emergencies always arise at the worst possible time—when you're already strapped for cash. These crises are why one may need a fund for an emergency.

It Helps Shed Light on Bad Spending Habits
Building a budget forces you to look at your spending habits closely. You may notice that you spent money on unnecessary things. Such as on your costly extended cable plan, multiple streaming subscriptions, or 30 pairs of white shoes. Budgeting allows you to refocus on your financial goals.

It's Better Than Counting Sheep
Following a budget will also help you catch more shut-eye. People who lose sleep over financial issues allow their money to control them. Take back the control. You'll never lose sleep over economic issues when you budget your money wisely.

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