How is a budget drawn up?

Budget - what is the budget?

The budget is the overall plan, formulated in terms of value, of all expected income and expenses. Usually, this also means the amount of money available as such.

Find out here how you can get an overview of your income and expenses - and thus always have your budget under control.

In business administration (BWL) one usually speaks of a budget in connection with a short-term financial plan that reflects the future financial year or the company's development.

Different definitions of budget

There are two major definitions of the budget: the budget as understood in public finance and in the context of business administration.

Budget (finance)

In the context of finance, the budget describes the budget - i.e. the forecast of public income and expenditure for a financial year.

The budget is thus an instrument of financial policy.

Budget (business administration)

The business administration, on the other hand, defines the budget as the overall plan of all expected income and expenses of a company.

As part of the budget plan, the financial resources of a company are controlled and figures from the accounting department are used as a basis.

Budget plan: components of a budget

The budget in business administration means a financial plan that controls the distribution of financial resources. The expected turnover is a central part of budget planning.

The budget plan consists of several sub-plans, for example:

  • Personnel budget
  • Investment budget
  • Research budget
  • Development budget
  • Marketing budget

While the so-called Execution figures budget contains only quantifiable information, this includes Action budget also the concrete measures that will be implemented in the next period.

Budget goals

The preparation of a budget is part of a company's financial planning. The highest budget targets are set by management, while the lower levels of the hierarchy create subordinate budget plans derived from them.

The budget is used for transparency: It compares expected costs and revenues and thus serves

  • ... the calculation of the liquidity risk
  • ... the setting of upper limits / targets for expenditure / costs
  • ... the definition of lower limits / targets for revenues / earnings

Any deviations from the budget must be explained and argued to the budget officer.

Time horizon of a budget

As a rule, budgets are viewed in different time horizons:

strategicallylong term5 to 10 years
tacticalmedium term1 to 5 years
operationalshort termless than 1 year

Strategic planning: budget

The strategic planning is always long-term over a period of 5 to 10 years. It includes all budgetary means for implementing the corporate strategy and thus serves to secure the future.

Tactical planning: budget

The medium-term tactical planning includes the budget that is necessary to implement the strategic measures.

It is therefore derived from the strategic planning.

Operational planning: budget

Operational planning, on the other hand, is very short-term with a period of 1 year and only takes into account the budget required for the individual business processes.

It is based on the short-term financial data from the income statement and liquidity plan.