In personal and professional finance, a budget is defined as the estimation of expenses and revenue over a specified period of time that is meant to take place in the future.
Often presented in the form of a list, the budget is periodically re-evaluated, compiled, and can be made for a family, an individual, a group, a government, a business, a nation, a multi-continental corporation, etc. It is one of the most common tools of a company that is utilized to determine the tradeoff of exchanges with respect to goods and services.
Surplus vs. Deficit
Additionally, budgets serve as the primary metric for determining the limitations of monetary allocation. Profits are anticipated in a surplus budget (revenue exceeds the budget), expenses are equivalent to revenue in a balanced budget, and deficit budgets see expenses exceeding revenue.
One who fails to set aside investment in the case of an emergency or for future gain will fail to be rewarded. Hence, budgeting is incredibly important to achieving financial goals and managing risk/reward.
Flexible vs. Static
The two major classifications include flexible and static budgets. Remaining the same for the course of the budget, static budgets ignore any and all changes that occur during a fiscal period as figures and accounts remain identical to the amount in which they were originally tabulated. Conversely, flexible budgets hold relational value to particular variables. For example, the dollar amounts will change based on production or sales levels. However, both classifications are incredibly useful to managers. While a flexible budget offers superior insight into the operations of a business, static budgets prove the effectiveness of the original process.