Creating a Successful Budget

Characteristic of a Successful Budget
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A budget can be seen as a map of financial freedom. It uses decisions as landmarks for where you need to be, what you should have at each point, and how to get there.

The budget features income and expenses, and the ultimate goal of creating a successful budget is to regulate spending to fit within the income.

Characteristics of a Successful Budget

Realistic Financial Goals

The financial goal is the most critical driver for any budget. It informs the parameters you will use to set targets and measure performance. Unfortunately, what makes many budgets fail is being set up to track actual costs instead of reaching the targets.

An ideal budget should reduce spending to a certain amount, limit waste, save enough money to purchase new equipment, pay for college, set up a retirement fund, expand an enterprise, or any other measurable financial gain.

Many budgets are limited to recreating the previous results and don’t have a short or long-term vision because they lack goals and direction.

The type of goals you set during budget preparation should be achievable based on your specific circumstances. If the mentality from the onset is that they are impossible goals, the spark that drives people to go for them will not be ignited. On the other hand, the more relevant the goals are, the higher the motivation levels.

Relevance

The items in the budget should be relatable and understandable for it to make sense to anybody who will participate in executing it. The categories of income and expenses and the accounting methods should reflect what is actually happening on the ground.

The income and expense projections are more relevant if they are based on current statistics instead of conjuring ideal situations that will leave loopholes for justifying why you did not meet the unrealistic targets.

There should also be enough categories so that it is easy to break down and monitor where the money is going and if the spending is worth the investment. A line-item budget also helps identify where you can cut costs and where more funds should be directed.

However, having too many categories can be counterproductive as tracking all the variables will become overwhelming. The optimum number of separate items in your budget will depend on your personality and the number of people in the team that monitors the monthly budget. This obviously will depend on whether it is a personal budget or a business budget.

Correct Income Projections

Every budget period is based on expected earnings, and misrepresenting this will defeat the purpose of having the budget in the first place. Factor in all sources of income so that you are accountable for everything. Combine both capital and proceeds from the capital while taking care not to overestimate your earning capability.

If the projection is too high, you will struggle to complete scheduled projects. The situation may worsen when the team supposed to implement the budget realizes that it is an impossible task. They will develop a level of apathy whose unfortunate risk is revenue fabrication. It will normalize underperformance.

Inclusion of Variable and Discretionary Expenses

It is possible to be too engrossed with recurrent running expenses that you fail to factor in other expenses taken care of by the same funds. This may disrupt the budgeting process completely when these expenses are due because you are forced to take from other important budget sections.

Variable expenses are expenses you don’t pay regularly, but you have to pay when they fall due. Variable expenses include licenses, insurance, car maintenance, taxes, and contracts, among others. If they are too much to cover with your monthly income, remember to spread the cost over many months so that you don’t struggle when they are due.

On a business level, a discretionary expense is expenses that are not mandatory, tempting you to omit them from the budget. These are unexpected expenses. These include entertainment, team building, corporate social responsibility, and related expenditures.

It is easy to bury your head in the sand when the economy is tight, but that is also when spending on these activities are needed the most. They are a necessary expense for mental health of an individual and for an organization. Including them in the budget makes them less of a burden and helps ensure a more successful business.

Flexibility

Any budget should allow for changes that may be necessary during the period such as unexpected bills. This will avoid debt and increase cash flow. Circumstances are prone to change, and sometimes you discover that your initial projections of your spending plan were inaccurate. The ability to readjust on the fly enables you to change strategy or adapt to new developments to better your organization and experience a more successful budgeting process.

The reasons vary from new market intelligence, unforeseen maintenance, and new technology to the prevailing Coronavirus pandemic.

A rigid budget plan will be an excuse for not executing remedial plans when events have overtaken the initial one. It can handicap you when opportunity knocks.

You can enhance your budget’s flexibility for irregular expenses by having a contingency kitty or making provisions for miscellaneous funds. Having a savings fund or other financial plan on the side can also be a buffer for extra money in such times.

Savings Account

A successful budget requires an avenue for channeling the surplus income known as a savings goal. It is from savings that investments and down payments are created. This can also be used as an emergency fund.

Income sources are prone to be inconsistent, and you may find yourself with unforeseen liquidity. There is a high chance of this going to waste if there is no place to channel the excesses. This should not be a problem if a savings plan is already in place.

Savings are the budget’s backup for emerging projects, and unforeseen calamities and provisions should be made for them like any other expenditure.

Regular Review

To know if a budget is successful, you should constantly be able to measure the variables to weigh where you are against where you envisioned you would be. All targets must be measurable so that you can know in good time if your strategy is working, how to enhance its efficiency, and what needs to be modified to achieve a balanced budget.

A budget is an excellent tool for gauging the performance of an individual or an institution. Using budgeting correctly can be the difference between achieving your goals and going around in circles. Of course, how you put these characteristics into play will depend on your situation and your motivation when it comes to budgetary control.

Budget calculation with calculator

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