A Budget is a plan that outlines an organization's financial and operational goals. So a budget may be thought of as an action plan; planning a budget helps a business allocate resources, evaluate performance, and formulate plans.
While planning a budget can occur at any time, for many businesses, planning a budget is an annual task, where the past year's budget is reviewed and budget projections are made for the next three or even five years.
The basic process of planning a budget involves listing the business's fixed and variable costs on a monthly basis and then deciding on an allocation of funds to reflect the business's goals. (For more on fixed and variable costs, see Breakeven Analysis.)
Businesses often use special types of budgets to assess specific areas of operation. A cash flow budget, for instance, projects your business's cash inflows and outflows over a certain period of time. It's main use is to predict your business's ability to take in more cash than it pays out.
And if you're planning on starting a business, planning a budget plays an important role in determining your start up and operating costs. The Financial Plan Section of the Business Plan provides information on calculating your start up and operatiing expenses.