Establishing a budget is important for families, businesses, government agencies and other organizations. A budget helps to establish a spending limit and how much money can be spent on individuals products and projects. An operating budget for a business helps to determine what types of products it can offer, how products will be marketed and even how workers will be compensated.
Government agencies and other organizations have similar concerns. The guidelines and limits of a budget often determine an organization's effectiveness in conducting its day-to-day business. Understanding the basic concept of a budget is necessary for creating one.
Deficit and Surplus
Deficit and surplus are two terms often used synonymously.
However, a deficit refers to the calculation that is the outcome of comparing the amount of money coming in versus the amount of money going out. Whenever the amount of money coming in is less than the amount that needs to be spent, the organization or business is said to be operating with a deficit. This usually results in the need to borrow money to keep operating expenses the same or cutting expenses to meet budget limits.
With a surplus, the opposite occurs. The business or organization has more money than it needs to spend and must then decide what to do with the additional money. It is usually used to pay any existing debt.
Read More: What is a Budget Deficit?
Understanding the basic concept of a budget is necessary for creating one.
Keeping Debt Manageable
Debt is an obstacle that many businesses and families often face. Debt is something that businesses seek to avoid because it refers to the long-term accumulation of deficits that carry over from year to year. The debt is repaid to the lender once the borrower has created a surplus that allows him to do so.
Cost of Maintenance
Costs refer to the amount of money that must be spent in order to maintain an organization or business. The same is true of families who have regular expenses and bills that they must pay. Adding up the total amount of cost determines the size of the budget.
A budget can consist of two types of costs: direct and indirect costs. Direct costs are those that result from specific projects for which a certain amount of funds must be allocated. Indirect costs are those that are necessary for the business to keep operating, but not specifically designated for a particular project. These are sometimes referred to as overhead expenses and include things like rent and utilities.
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Balancing the Budget
Budget balancing refers to the accounting process used in establishing a budget. There are different types of accounting used in the budgeting process.
The purpose of using accounting procedures to balance a budget is to keep those in charge of spending the money responsible for their actions. In the end, a budget should be balanced so that the expenditures and income match each other, or so that a surplus is created in order to eliminate debt. You can use budgeting apps to help with the process.
Read More: The Effects of a Debt Crisis
Jared Lewis is a professor of history, philosophy and the humanities. He has taught various courses in these fields since 2001. A former licensed financial adviser, he now works as a writer and has published numerous articles on education and business. He holds a bachelor's degree in history, a master's degree in theology and has completed doctoral work in American history.