There are many different types of budgets that you can use to manage your finances. This blog post will discuss seven of the most common types of budgets and provide examples for each one. By understanding the different types of budgets available to you, you can choose the one that best suits your needs.
Let’s get started!
1. Performance Budget
A performance budget is a type of budget that focuses on measuring and improving performance efficiency.
You can use it for government programs, non-profiteering organizations, or businesses.
This type of budget typically includes a set of performance goals and indicators used to track progress.
A performance-based budget for a city’s police department might allocate more money to the precincts with higher crime rates.
It may also budget its spending on new equipment to allow more resources in forensics or SWAT team training departments.
2. Fixed Budget
A fixed budget is a type of budget where you advance the amount of money allocated each time.
This type of budget does not change, even if there are changes in sales or production levels.
A fixed budget helps businesses to predict their expenses and plan for future growth.
A small business might have a fixed budget for $500 per month of advertising.
This budget will not change, even if the business has a slow month and does not make as much money as anticipated.
3. Flexible Budgets
A flexible budget is a budget that you can adjust to suit sales or production levels changes.
Flexible budgets are more common in businesses than in households since businesses often have fluctuating incomes and expenses.
A flexible budget can help businesses better manage their finances by adjusting their spending.
A manufacturing company might have a flexible budget for the cost of materials.
If the company produces more products than anticipated, it can adjust its budget to accommodate the increased costs.
Conversely, if the company produces fewer products than anticipated, it can adjust its budget to save money.
4. Incremental Budget
A total budget is a type of budget where the amount of money allocated for each period is increased by a set amount.
Businesses often use an incremental budget to account for growth.
Households can also use it to allow for inflation or other changes in income or expenses.
A company might have an incremental budget for its marketing expenses.
Each year, the company will increase its budget by $50,000 to help scale the growth of the business.
Another example is when the business wants to ensure enough customer service as more customers come in.
They will need to make a total budget for more customer service representatives.
5. Rolling Budget
A rolling budget is a type of budget where you set the amount of money allocated for each time in advance, though the time covered by the budget changes.
This type of budget can be helpful for businesses to predict their expenses and plan for future growth.
Households can also use it to track expenditures over time.
A small business might have a rolling budget for $500 per month of advertising.
The budget will not change, but the time covered by the budget will change each month.
You can see this in advertising campaigns where the budget is there already, but the period changes based on when the campaign will air.
6. Cash Budget
A cash budget is a type that tracks the inflow and outflow of cash for a business or individual.
This type of budget is essential for businesses to track and manage their cash flow.
For individuals, a cash budget can help manage their finances and track their spending.
Some examples of items that you can include in a cash budget are:
- Revenue (sales, interest, dividends)
- Expenses (operating expenses, taxes, interest)
- Investments (purchases of assets)
- Loans (principal and interest payments)
By having a cash budget, businesses and individuals can better track their finances and make sure they have enough money to cover their expenses.
It helps to ensure that businesses and individuals don’t overspend and get into debt.
Cash budgets are great for categorizing and breaking down the many aspects of finance into a visual and manageable form.
7. Zero-Based Budget
There are two ways to think of zero-based budgets.
A zero-based budget is a type of budget where new projects will receive a new budget amount.
The zero budget differs from other budgeting forms because all projects will have a set budget, no matter the size.
The goal of this budget is to prevent overspending on any one project.
To create a zero-based budget, start by allocating a specific amount of money to each project.
Then, track how much money you actually send on each project.
If a project is over budgeted, make adjustments to ensure that all projects stay on track.
A company decides to develop a new product.
It needs to create a budget for the project.
It may start by allocating $100,000 to the project.
Then, it tracks how much money it spends on the project.
If it finds that it’s spending more than $100,000 on the project, it will adjust to ensure that the project stays on track.
The company does not cut costs in other parts of its business to make up for the new budget for the new project.
That way, the company ensures that other aspects of the business do not suffer.
Another way a zero-based budget is described for finance is to make sure that you do not go under $0 and there is as little excess cash to be depleted by inflation.
This type of budget ensures that all money that comes in has a purpose and you are not overspending.
To create a zero-based budget, track all sources of income and make sure you allocate each dollar to an expense.
You can do this by creating a budget for each month.
Track how much money you spend on each expense.
If an expense is over budget, make adjustments to ensure that all expenses stay on track.
A family of four has a total monthly income of $5000.
They create a budget for each month and allocate their income to their expenses.
They track how much money they actually spend on each expense.
If they spend more than $5000 on their expenses, they will adjust to ensure their budget stays on track.
If they have any excess cash, they know precisely which investment and savings account it will go to.
The above exercise helps them stay out of debt while letting their money work through their investments.
7 Types of Budgets (conclusion)
There you have it – seven types of budgets to help you get started.
Find the best option that will work for you and your finances.
Remember, the goal is to create a budget that you can manage.
If you find that one type of budget isn’t working for you, don’t be afraid to try another.
The most important thing is to stay on top of your finances and make wise money decisions.