What is Budgeting?

Budgeting in a business sense is the planned allocation of available funds to each department within a company. Budgeting allows executives to control overspending in less productive areas and put more company assets into areas which generate significant income or good public relations. Budgeting is usually handled during meetings with accountants, financial experts and representatives from each department affected by the budgeting.

In a personal financing sense, budgeting can mean estimating monthly living expenses based on previous bills and wages. If your monthly income is a steady $3000, for example, you can subtract all of your known monthly bills from that figure even before they arrive. Some bills can be estimated and subtracted from the original income figure. The remaining balance after fixed expenses now becomes your household budget. Instead of assigning dollar amounts for sundries such as groceries, entertainment, gas and clothing, budgeting allows you to use percentages instead.

The key to successful budgeting is both flexibility and inflexibility. Certain expenses are fixed, so payment of those bills should be an inflexible element. Nothing is more important than paying those particular bills in full. In business, departments need to know the absolute ceiling on spending. Budgeting works best when very few exceptions are made to the upper limits. The idea of fiscal responsibility is to form a workable budget and stick to it as best as possible.

Budgeting also requires an element of flexibility. It isn't always possible to assign a fixed dollar amount on a project in January and expect the budget to remain stable in July. There are always unexpected events which can drastically change the priorities of a company or an individual. Without flexible budgeting, money allocated for one purpose could not be reallocated during a fiscal emergency. An unexpected drop in sales revenue in March can affect the budgeting plans in November, so accountants and financial officers need to adjust their figures regularly.

When economic times are good, many people become lax about personal budgeting. As long as there is more money coming in than going out, all is well. But those who learn to establish a workable budget and keep within it during the lean times often survive major financial crises better than those who don't. Financial discipline can spell the difference between weathering the storm and declaring bankruptcy.