Modern methods of financial resources include planning, keeping records, ways of reducing expenses, and other nuances. Find out more about different types of a budget with examples, advantages, and disadvantages of each of them. This topic should be given special attention because it might help you improve your financial literacy.
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A budget is a tool for current planning. It indicates how to use available resources, taking into account some economic factors and market opportunities. In the process of developing budgets, it is necessary to foresee possible problems and ways to solve them.
Types of budget
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In general, all types of budget can be divided into such categories:
- Family budget (joint, separate, shared)
- Short- & long-term budgets
- Line item budgets
- Lapsing budgets
- Flexible and static budgets
- Incremental & zero-base budgets
Speaking about types of family funding, we should keep in mind that they all depend on types of family income. Namely, who makes money and whether one or two members work.
Joint funding
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A joint budget involves the collection of all incomes of both family members in the so-called “common pot,” from which all expenses and personal expenses of each spouse are paid.
This type of spending plan can have several varieties:
- The family has two earners and two controllers. Each member takes part in the formation of the family funds and the distribution of its funds.
- The family has one breadwinner and two controllers. Family funding revenues consist of earning only one member, but both sides manage them.
- The family has two earners and one controller. Both members form a budget, but one of them controls them.
- The family has one breadwinner and one controller. The source of the formation of the funding is the income of one member, and someone else also manages the budget.
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Separate family budget
A separate spending plan assumes that there is no “common pot,” each member independently manages their income.
In this case, in the maintaining of a separate measure, each spouse pays for family and personal expenses that are necessary.
Shared funding
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As you may have guessed, a shared budget is a combination of joint and separate types of budgets. The principle of reference is the following: there is a “common pot” in the family, but each spouse puts only an individual, a predetermined share of their income into it.
Short- & long-term budgets
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A long-term budget is considered to be funding compiled for two years or more, and a short-term budget is compiled for a year or less.
According to various opinions, the “forecasting horizon” is from six months to two years. Thus, it seems entirely rational to consider quarterly and less as short-term fundings, and from six months to a year as long-term ones.
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Often, in a company, long-term and short-term budgeting is combined into a single process. In this case, the short-term funding is drawn up within the framework of the developed long-term measure, and the long-term measure is clarified after each period of short-term planning and “rolls” forward, as it were, for another period.
A short-term measure, as a rule, has much more control functions than the long-term one, which mainly serves for planning purposes.
Line item budget
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This budget provides a strict limit on the amount for each item of expenditure without the possibility of transfer to another article.
For example, if you have planned to spend no more than $5,000 on advertising, then you will not be given any more, even if you managed to save $15,000 on other expenditures.
This approach is widely used in government institutions, but as well it is often used in commercial organisations to provide tighter control and limit the powers of lower and middle managers.
Lapsing budget
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This term refers to a budgeting system in which the unencumbered balance is not carried over to the next period.
This kind of budget is used in most organisations because it allows to more accurately monitor the activities of managers and the consumption of company resources, stopping the “accumulation” trends.
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The disadvantages of this method include the unevenness of funds spending, when at the end of the period managers begin to urgently spend the balance on often unnecessary expenses or directly in a non-optimal way, fearing that in case of “under-spending” the measure for the next period will be cut by the appropriate amount. Besides, at the end of the period, quite a lot of effort is spent on inventory and reporting.
For example, a company did not spend the advertising budget, and some of the money remained. If this money is not spent before the end of the year, then the advertising budget for the next year will often be reduced by the same amount. Therefore, the management is trying to find additional advertising tools that spend the remaining money from the annual budget.
Flexible and static budgets
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In the most commonly used static budget, the figures are independent of production volumes, etc., while in drawing up a flexible budget, expenses are made dependent on a particular parameter, usually characterising production or sales.
An excellent example of a flexible budget can be the funding of a concert, when all budget items, including the number of guards/police and the fees of artists, are made dependent on the number of tickets sold.
A flexible budget is reasonable because it allows to more adequately assess the effectiveness of the work of units that do not provide sales, but which play a supporting role to them.
Incremental & zero-base budgets
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A zero-level budget is re-created every time, “from scratch.” In contrast to it, the incremental funding has something of a pattern in which during the next budgeting only adjustments are made reflecting the current changes in comparison with the traditional process.
For example, a business training budget for the next year is considered based on the planned number of training and their cost. As long as the training number, its necessity and types are not justified, the item “costs of training” in the budget of the current year is absent. That is, budgeting from scratch makes it more serious to think about the need for certain expenses and therefore, as a rule, more realistic.
An incremental budget dramatically reduces the amount of effort and time spent on the funding process. However, it also has quite severe drawbacks; the main one lies in the danger of the formation of "stagnant sites" stretching from the past without changes, which could be revised and optimised when budgeting from scratch.
For example: when planning the budget, a company uses the budget figured of last year but makes amendments regarding possible changes. This could be, for example, a change in tax legislation or a new marketing strategy of a company.
A budget is a means of monitoring and evaluating performance. Financial control and assessment of the performance of an organisation are based on a comparison of actually achieved and planned indicators. The types of budget listed above allow a family or a company to control the impact of many factors that influence the final result. Constant monitoring of the implementation of budgets will enable you to quickly respond to changes in any situation and take the necessary measures.
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Source: Legit.ng
