15 Different Types of Budgets and Methods
Managing finances involves budgeting, which is essential for individuals and organizations to track their money usage. Whether personal or business finances, having control over spending is vital for financial success and well-being.
There are different types of budgets and methods available to choose from when trying to manage your spending, each tailored for personal finance, businesses, or government.
We’ll explain the various types of budgets and methods so you can start building a framework for efficient financial management.
Table of Contents
What is Budgeting?
Budgeting is planning how you’ll spend your money and limiting the amount of spending. It’s a vital tool for managing your finances, as creating a budgeting process tracks your income and expenses to make informed decisions on allocating your finances.
To avoid overspending in any specific category, like housing, food, or entertainment, it is helpful to establish spending limits for each one.
Budgeting isn’t just for personal finance, but it’s also crucial for businesses. It sets limits on spending for different departments or projects while reallocating finances to other areas.
Additionally, having a financial budget helps prepare for unexpected expenses and ensure that you are saving enough for the future.
Components of a Budget
There are several factors that make up a budget:
- Revenue – Money that is expected to be received over the budget period. (Income, Sales)
- Fixed Costs – Costs that remain the same amount every month. (Rent, Insurance)
- Variable Costs – Costs that changes each month based on usage. (Utilities, Supplies)
- Emergency Fund – Set aside a portion of income to savings account or emergency fund to cover unexpected losses while building interest.
- Investments – Set aside to make more money over time through bonds, stocks, real estate, or invest in new assets.
- Debt – Money dedicated to paying off debts like loans.
- Profit – The remaining amount after accounting total revenue and deducting total costs and expenses. It’s how much income generated.
Types of Budgets
Personal Financial Budgets:
50/30/20 Budget
The 50/30/20 budget is a popular approach to managing personal finances on a monthly basis that has helped many people achieve their financial goals.
It involves allocating 50% of your income for necessities like rent/mortgage payments, food, and bills. Next is 30% for discretionary spending like dining out, entertainment, and clothing. Finally, the remaining 20% is for savings and debt payments.
By utilizing this effective budgeting technique, you can guarantee that your expenses are within your income, prioritize your spending, and establish a strong financial base.
Envelope Budget
Envelope budgeting is an effective method to try out if you want to spend within your means.
You separate different spending categories, such as groceries, entertainment, or transportation, into an envelope for each category and only spend the amount of cash you have allocated for that category/ envelope.
Doing this eliminates overspending and keeps you focused on your financial goals. In addition, physically giving and seeing how much cash you have left makes it easier to prioritize your spending and avoid unnecessary expenses in the future, building a better finance habit.
Business Budgets:
Master Budget
A master budget is a comprehensive financial plan that combines all the individual budgets of different departments or business units within an organization.
This financial budget is developed by consolidating smaller budgets that cover different business areas, such as sales, production, and marketing, to create a unified view of the company’s financial position.
Usually, a master budget looks over one year and provides a roadmap for an organization’s financial operations and performance.
A master budget is essential because it helps businesses forecast their revenue and expenses and determine their cash flow, profitability, and growth potential. It also assists in identifying potential areas for cost-cutting and improving efficiency and productivity.
Operating Budget
An operating budget outlines the expected income and expenses for a specific period. They are generally created for a year, reviewed, and adjusted as needed throughout the year to ensure they remain accurate.
The operating budget encompasses all expenses essential for the business to operate smoothly, which includes salaries, rent, utilities, and raw materials.
Cash Budget
Cash budget AKA cash flow budget provide an accurate assessment of cash movement over a specific period. They serve as forecasts that identify when cash enters and exits.
It also help businesses anticipate any shortfalls in cash flow and plan accordingly to avoid potential financial problems that could occur.
Businesses rely on financial planning tools as an essential way to plan their cash flow needs, keep an eye on expenses, and manage working capital effectively.
Static Budget
Static budgets provide a financial plan that predicts income and expenses over a specific period by making estimates at the outset of that period.
The budget remains unchanged throughout the period, even if unexpected situations arise. Useful for businesses that have stable operations or need to plan for a specific period with predictable results.
Flexible Budget
A flexible budget is a budget that adjusts to changes in business activity. It is a helpful tool for businesses that experience fluctuations in their revenue, expenses, and overall operations.
Unlike a static budget, which remains fixed, a flexible budget changes as the business changes. The flexibility to adjust budgets for fluctuations allows businesses to make smarter financial decisions, manage risk more effectively, and stay prepared.
Labor Budget
Labor budgeting is an essential tool that companies use to allocate the necessary resources for various projects. It involves estimating total labor costs, taxes, benefits, and overtime pay.
Businesses can monitor employee productivity to ensure they meet their targets and decide if they need to hire more labor or lay off employees if their expenses exceed the budget.
Line-Item Budget
A line-item budget is another simple yet detailed approach to budgeting that allows organizations to track their expenses by breaking them down into specific categories or line items.
Every expense and revenue will be listed as a separate line item. This type of budget is often used in government organizations and businesses, as it allows for a detailed breakdown of expenses and revenue sources.
The advantage of line-item budgeting is to track where the money is coming from and going.
While it may take some initial effort to set up, a line-item budget can ultimately save time and reduce confusion when it comes to tracking expenditures.
Government Budgets:
Balanced Budget
Balanced budgets refer to any government or organization budget in which revenue and expenditure are equal.
In other words, an entity must only spend what’s given them and cannot incur debts; they will need to use every bit given them wisely without incurring debts.
Surplus Budget
When a government spends less than they earn in revenue, it results in a surplus budget.
Simply put, when income exceeds expenses, governments have extra funds available for emergencies, economic development projects, or paying off debts.
Having a surplus budget is also an indication of good financial stability and sound fiscal management.
Budgeting Methods
Zero-based Budgeting
Zero-based budgeting (ZBB) is an approach to budgeting that requires managers to justify and account for every expense in their department or organization from scratch without relying on previous budgets as a baseline.
It differs from traditional budgeting, where managers and organizations modify existing budgets based on whether expenses increased or decreased in the prior year.
Organizations can gain better control and understanding of their expenses. It promotes a culture of accountability and cost-consciousness, ensuring the expenses incurred are necessary, leading to efficient use of resources, cost reduction, and a more streamlined organization.
Incremental Budgeting
Incremental budgeting is an approach to budgeting that utilizes last year’s budget as the starting point to construct one for this upcoming year.
This budgeting approach is commonly used in government agencies and other large organizations because it is simple, easy to use, and makes minor improvements throughout the year.
It helps identify where they can reduce costs and increase revenue without upsetting the current financial equilibrium their business has already set up.
Value Proposition Budgeting
Value proposition budgeting is an innovative method of allocating resources and funds toward your organization’s most essential initiatives and projects.
The approach involves identifying core values and benefits that your products and services offer to your target audience and using these advantages to prioritize which projects and initiatives should receive the most support and resources.
Essentially, value proposition budgeting aims to focus on what matters most to your customers and stakeholders, helping you make strategic investments.
Participative Budgeting
Participatory budgeting enlists input and participation from key stakeholder groups – managers, employees, and customers.
Unlike traditional budgeting, where only top-level managers make financial decisions, participative budgeting gets everyone involved in the decision-making process.
Takes into account the views and concerns of different parties while setting financial targets for the organization.
The key benefit of participative budgeting is that it increases employee motivation, buy-in, and accountability. People feel more invested in the process when they have a saying, leading to greater commitment and improved performance.
Closing Thoughts
Budgeting is a great way to understand your finances and stick to your goals for both personal individuals and businesses.
An effective budget allows you to gain control of your financial situation and decide where to cut back on spending while others need increased attention.
With a proper budget, it’s easier to create achievable financial goals and objectives, manage expenditure better, reduce wasteful spending, and make smart investments.
