What Is a Budget?
A budget is a financial plan that estimates expected revenue and expenses over a specified future period, usually a month, quarter, or year. It sets targets for spending and income and becomes the benchmark actual results are measured against.
What a budget is and why it matters
A budget translates a business's plans into numbers. It forces decisions about how much to spend, where, and against what expected revenue — then serves as a control tool once the period is underway. Comparing actual results to budget produces variances that flag where the business is over- or under-performing, prompting corrective action. Budgets take several forms (incremental, zero-based, rolling) and sit at the heart of financial planning and analysis. For firms offering advisory services, building and monitoring a client's budget is a recurring, high-value engagement.
A worked example
A small business budgets Q1 revenue of $300,000 and expenses of $250,000, planning for $50,000 profit. At quarter-end, actual revenue is $290,000 and actual expenses $240,000, for $50,000 profit. Revenue came in $10,000 under budget (unfavorable) while expenses were $10,000 under budget (favorable), netting to the planned profit. The variance analysis shows the target was hit, but through lower spending rather than the sales that were planned — a signal worth investigating.
How firms handle it today
Firms build budgets in spreadsheets or FP&A tools from historical data and client input, then run periodic budget-versus-actual reports to track performance and explain variances.
Related terms
- Forecasting
- Variance
- Zero-based budgeting
- Cash flow
- Overhead
FAQ
What's the difference between a budget and a forecast?
A budget is a fixed plan of targets for a period; a forecast is an updated projection of what's actually likely to happen as conditions change.
What is variance analysis?
It compares actual results to the budget, quantifying and explaining the differences so managers can respond.
What are common types of budgets?
Incremental (based on last period), zero-based (built from scratch each period), and rolling (continuously extended) budgets are the most common.