What is a budget?

Definition

A budget is the approved plan of revenue and spending for a coming period. On the books this is not a ledger account; it is the set of planned amounts the board or owner signed off on before the period starts.

Those planned amounts live beside the books, not inside the daily postings. Actuals still post to the general ledger; the budget is the target those actuals will later be compared to.

A later comparison report and a mid-year update of where the numbers are heading are different documents.

Where it shows up

P&L: Related to the planned revenue and spending the actuals will be compared to.

Balance Sheet: Related to planned asset purchases and financing when those are in the plan.

Cash flow: Related to planned receipts and payments when a cash budget is included.

See also: Budget Versus Actual · Forecast · Annual Operating Plan

When you look at your Income Statement, the budget is not a printed actual line. It is the planned revenue and spending sitting next to those actuals so a reader can see the plan.

The Balance Sheet may carry planned asset purchases and financing when those items are in the plan. A daycare that budgeted a new playground would see that spend in the plan even before the equipment is on the books.

A cash plan, when one is included, shows planned receipts and payments. Cash in the bank is still the actual; the cash plan is only the expected path.

Owners and boards usually approve the plan before the period starts. Once approved, it is the target for that period until someone formally revises it.

How it works

Someone drafts the plan from last year's results, from known contracts, and from decisions already made. Teacher hours, tuition rates, and rent are typical inputs for a small service business.

The draft is reviewed and then approved. Until that approval, it is still a proposal; after approval it is the budget.

The plan is stored by account and by period. September tuition is one cell; September teacher payroll is another.

Operating expenses get their own lines. So do revenue lines, and sometimes planned equipment buys and the cash those buys will take.

A part of the business can be tracked for its spending rather than its profit. That slice still rolls into the same approved plan.

The plan does not post itself. No journal entry is required for the board to approve September's numbers; the books move only when actual transactions happen.

During the period, actuals accumulate in the ledger. The plan stays put unless the board approves a revision.

A full-year version of the same idea ties revenue, spending, and staffing together for the fiscal year. The approved plan for a coming period may be a month, a quarter, or that year.

Building from zero each cycle is one method. Adjusting last year's plan is another; both still end in an approved plan.

Example

Maple Room Daycare's board meets in August. It approves $20,000 of tuition revenue and $14,000 of teacher payroll for September.

Those two amounts become the September plan. Rent, snacks, and insurance have their own approved lines as well.

September actuals still post as they happen. A new family enrolls and tuition comes in at $21,500; payroll lands at $14,000 as planned.

The plan does not change because tuition ran hot. The $20,000 tuition line stays as the approved target; the extra $1,500 is an actual, not a new plan.

If the board later raises the October tuition plan to $22,000, that is a revised budget. Until then, October keeps whatever the board already approved.

Common mix-ups

A budget is not the comparison of plan to actual. That report shows the gap after the period; the budget is the approved plan itself.

A budget is not a forecast. A forecast is an updated projection of where the numbers are actually heading; the budget stays as the approved target until someone revises it.

A budget is not the same as a full-year operating plan. The annual plan ties revenue, spending, and headcount together for the year; a budget can be that year or a single month inside it.

Related terms

• Budget Versus Actual: The comparison of planned amounts to what actually happened.
• Forecast: An updated projection of where the numbers are actually heading.
• Annual Operating Plan: The full-year plan tying revenue targets, spending, and headcount together.
• Variance Analysis: Investigating and explaining differences between two sets of numbers.
• Capital Budget: The plan for major asset purchases over a period.
• Headcount Plan: The staffing plan behind budgeted payroll cost by period.
• Zero-Based Budgeting: Building a budget from nothing each cycle rather than adjusting last year's.
• Cost Center: A part of the business tracked for its spending rather than its profit.