DEFINITION AND PURPOSE
What is your definition of a budget? Try to write your own definition before you start this section of the module.
Here is one definition: “A budget is a financial plan, usually for a period of a year, related to the organisation’s overall strategic plan.”
Let us unpick this statement.
- We are only concerned here with financial budgets. It is possible to budget for other things but these often come down to money in the end.
- A budget is a plan – that is something which someone intends to put into effect. Compare this to a forecast, which is a prediction of what might happen without the idea that any action is going to be taken to make it come about.
- A budget is often a plan for a period of a year, with sub-periods of a month. Financial plans beyond this tend to be more in the nature of forecasts. However a budget for a particular project may be for a longer period.
- An annual budget should be seen in the context of the organisation’s longer term strategy. For example, an organisation may have a long-term plan which requires a large capital investment such as a major building project. In this case it may budget for lower expenditure for a number of years in order to build up its reserves to finance the new project.
Make a list of the different purposes a budget is used for.