Question

What is a budget? Why do businesses use budgets? Have you ever developed a personal budget? If so, was it helpful?

Answer 1

Meaning of Budget - Quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues; resource quantities; cost and expenses; assets, liabilities and cash flows.

Why do businesses use budgets ?

1. A budget acts as a business barometer.

2. A budget is one way to direct and coordinate business activities and units to achieve stated targets of performance.

3. As time passes, the actual performance of an operation can be compared against the planned targets. This provide prompt feedback to employees about their performance. If necessary, employees can use such feedback to adjust their activities in the future.

4. Feedback received in the form of budget report from the responsibility centre. This report is helpful to know the performance of concerned unit.

5. Comparing actual results to the plan also help prevent unplanned expenditures. The budget encourages employees to establish their spending priorities.

Therefore, budgets help businesses in achieving the overall objectives of the organisation.

Have you ever developed a personal budget?

Yes.

Personal Budget - I stay in a hostel in a different city. Being an independent working woman, i bear all my expenses (like rent of the hostel, conveyance, food expenses, movies/entertainment/shopping expenses) on my own. My monthly room rent is $ 6000 and my monthly salary is $ 40000. One month back, i decided to buy one laptop cost of which was $ 30000. In order to have enough money in hand at the end of the month(OBJECTIVE), i made a monthly budget as follows -

Salary $ 40000

Room rent $ 6000

Conveyance $ 2000

Food $2000

Balance for laptop $ 30000

This way, i sketched the budget. However, at the end of the month, actual expenses were as follows -

Salary - $ 40000

Room rent $ 6000

Conveyance $ 1500

Food $ 2500

New clothes/sweets purchased for festival $ 2000

Balance for laptop $ 28000

Here, i was found short with $ 2000 as i has to spend extra 2000 for clothes/sweets. I should have made budget keeping in my mind that month for which budget is being prepared is full of festivals where extra money would run out of hand.

In my case, budget was made but was REVISED at the end of the month. However, budget was helpful in my case in controlling unnecessary expenditure and achieving the objective(purchasing laptop). I purchased laptop in 2nd month post revision of the budget.