Budget – Definition

Definition of budget (business): A long term financial plan which shows how a company plans to achieve its objectives. A summary of the income and expenditure a company will spend over the budget period.

Definition of budget (personal finance): A list of personal expenses, such as mortgage payments, groceries and meal which an individual attempts to stick to over the budget period.

Definition of Budget (economics): The Budget is an annual announcement by the Chancellor of the Exchequer, setting out the governments plan to tax and spend over the coming fiscal year. The Budget is usually executed by way of one or more bills of parliament which enact the changes to legislation required.

As the best economics books will explain, the budget communicates the fiscal policy of the government. Fiscal policy is which is one of the two main ways the government can control a free market economy (the other being monetary policy which is devolved to the Bank of England).

Budget definition
The definition of budget is a business & personal finance concept

What does budget mean?

In everyday usage, a budget is a financial plan. A budget is usually an ambitious or stretching target, which may require additional solutions to meet.

A corporate budget is typically set ahead of the financial year. It can be set by senior management (known as a ‘top-down’ budget) or by relatively junior department heads (known as a ‘bottom-up’ budget setting process).

Budgets are internal targets and are not generally communicated outside of the organisation. As a result, the budgets of listed companies could be considered inside information.

Employees are usually incentivised to meet or exceed the budgeted result with a bonus plan which pays more if the target is met. Some bonus plans contain multiple payout scenarios or ‘rachets’ which pay more for higher levels of outperformance.

The incentive to meet a budget can often result in unethical or illegal behaviour by both employees and senior management.

Business leaders will attempt to find a sensible balance between ambition and achievability.

If a budget is set too low, employee productivity may reduce as employees realise they can ‘coast’. If the budget is set too high, employees may simply give up trying.

Using the word ‘budget’ in a sentence

Here are some examples of the word ‘budget’ being used in a sentence:

“We should probably choose the cheaper venue for the Christmas party as I hadn’t budgeted for this many employees planning to attend this year.”

I think we can just about meet the budget if we win the upcoming pitch with the Italian client.”

“We’re too far behind budget to claw ourselves back at this late point in the year.”

About this definition of budget

People often wonder whether there is a difference between the definition of budget and the definition of forecast.

Businesses make both budgets and forecasts – why are they named differently? The answer is quite simple.

A budget is a static target. It’s a goal post which is approved by the business leader and gives a fixed benchmark for the business to be judged against.

A forecast is simply the latest expectation. It’s fluid and can be updated as regularly as the business likes.

To use both words in one coherent sentence: a business might prepare a forecast at the middle of the year, to understand whether they are still on track to meet their annual budget.

How does the definition of budget relate to investing?

I recommend that everyone creates a personal budget at least once per year to refresh their understanding of their income and outgoings.

By creating a budget, you can understand how much money you can expect to have leftover to save or invest.

When you don’t hold yourself to a target, and make purchase decisions on the fly, it’s easy to quickly lose track of the bigger picture and fail to save enough money to meet your investment goals.

With a budget figure in mind, even if it’s just a rough goal, you may feel more motivated to hold off spending decisions (or make cheaper decisions) because you are mindful that they will directly help you reach a healthy financial position in the longer term.

Many personal finance books include a section on how to budget well and save money, whereas management accounting books will cover the process of budgeting within an organisation. To find about more about how to create a budget, I suggest looking at the best budgeting and money management books.

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