Budgeting is an essential part of financial planning and management. It helps businesses and individuals to plan their finances, track expenses, and make sure they stay within their spending limits. There are five main types of budgeting: Master Budget, Imposed Budgeting, Item Budgeting, Global Budgeting, and Envelope Budgeting. Each type has its own advantages and disadvantages, so it's important to understand the differences between them.
A Master Budget is a combination of a company's separate budgets with the goal of providing a comprehensive view of its financial activities and health. It is usually created by the company's executives and provides an overall picture of the company's financial situation.
Imposed budgetingis a top-down budgeting process in which company executives set a budget to meet a specific goal. This method is ideal for companies that need to meet challenging objectives.
It involves setting goals and budgetary activities that must be followed by lower-level employees.
Item budgetingis a type of budgeting that is used to track expenses throughout the year. Companies use item budgeting to analyze cash inflows and outflows, while individuals can use it to keep track of their monthly expenses. To create an item budget, you must list each expense or category of expenses for a certain period of time, such as a month or a year.
Global budgetingis a type of budgeting that involves setting up a fixed amount of cash to spend in each budget category. The first step in creating a global budget is to determine the amount of discretionary income you have each month.
Then, you must determine how much you want to allocate to each category of expenses.