Understanding Budget Functions and How to Create a Business Budget

A budget is a plan for a period, such as a year, written in numbers: what the business expects to earn, what it expects to spend and when the cash moves. It does four jobs. It turns goals into a plan, gives managers something to control spending against, tells the people involved what's expected, and gives a benchmark for judging results. Building one starts with a sales forecast, works through the operating and financial budgets, and ends with a regular comparison of actual results with the plan.

Billed publishes this page. Definitions and descriptions are quoted from the open textbook Principles of Accounting, Volume 2: Managerial Accounting (OpenStax), section 7.1 and the chapter 7 key terms, opened on October 30, 2026. For a cash budget worked month by month, see what is corporate financial management.

What a budget is

OpenStax defines a budget as a "quantitative plan estimating when and how much cash or other resources will be received and how the cash or other resources will be used". It adds: "The most common time period covered by a budget is one year".

The functions of a budget

• Planning and control: "A good budgeting system will help a company reach its strategic goals by allowing management to plan and to control major categories of activity, such as revenue, expenses, and financing options."
• Communication: "Budgeting is a formal method to communicate a company's plans to its internal stakeholders".
• Evaluation: "Budgets set defined benchmarks that may be used for evaluating company and management performance".

How to create a business budget

1. Start from your goals. OpenStax says: "Management begins with a vision of the future." Write down what the business is aiming for this year.
2. Forecast sales first. OpenStax notes that the operating budget's subsidiary budgets "all begin with projected sales". A sales budget is a "budget showing the expected sales in units and the sales price for the budget period".
3. Build the operating budget. OpenStax describes it as the budget that "helps plan future revenue and expenses and results in a projected income statement."
4. Build the financial budget. It "plans the use of assets and liabilities and results in a projected balance sheet." It includes the cash budget, a "combined budget of all cash inflows and outflows of the organization".
5. Put them together. The master budget is the "overall budget that includes the operating and financial budgets".
6. Compare actual results with the budget each month, and look into the gaps. See what is variance analysis.

Choosing how to build it

• Last year as the starting point: OpenStax says "management often starts with the current year's budget and adjusts it to meet future needs."
• Zero-based: "Zero-based budgeting begins with zero dollars and then adds to the budget only revenues and expenses that can be supported or justified." See what is zero-based budgeting.
• Top-down or bottom-up: "The top-down approach typically begins with senior management." The bottom-up approach "begins at the lowest level of the company."
• Static or flexible: a static budget is a "budget prepared for a single level of activity for a given period"; a flexible budget is a "budget based on different levels of activity".

In a small business, top-down and bottom-up may be the same person. The choice that matters more is whether to start from last year's numbers or rebuild them.

Sample: a quarterly sales budget, then a check against actuals

The business and figures here are a sample, invented for this example.

A training company sells a workshop package. It plans to sell 40 packages in Q1, 50 in Q2 and 60 in each of Q3 and Q4. It charges $250 a package for the first half of the year and $275 from Q3.

• Q1: 40 × $250 = $10,000
• Q2: 50 × $250 = $12,500
• Q3: 60 × $275 = $16,500
• Q4: 60 × $275 = $16,500
• Year: $10,000 + $12,500 + $16,500 + $16,500 = $55,500

At the end of Q1, the company actually sold 37 packages at $250, so 37 × $250 = $9,250. That's $10,000 − $9,250 = $750 below the budget, which is 3 packages × $250. That gap is the starting point for the monthly review in step 6.

Where Billed fits

Billed's financial reporting page says: "See how profitable your business is with Income vs Expense report." Its expense tracking page says: "Billed's expense report can group your expenses by category." Those reports give you actual figures to compare with your budget. For cash timing, see what is cash flow and what is a cash flow statement.

Related Articles

• What Is Corporate Financial Management?
• What Is Variance Analysis?
• What Is Zero-Based Budgeting?
• What Is a Cash Flow Statement?

Frequently Asked Questions

What is a budget in business?

A plan, written in numbers, of what a business expects to earn and spend in a period. OpenStax defines it as a "quantitative plan estimating when and how much cash or other resources will be received and how the cash or other resources will be used".

What are the functions of a budget?

Planning, control, communication and evaluation. OpenStax says a good budgeting system lets management plan and control major categories of activity, communicates plans to people inside the company, and sets benchmarks for evaluating performance.

Where do you start when creating a budget?

With the sales forecast. OpenStax says the operating budget's subsidiary budgets all begin with projected sales, and the sales budget is a "budget showing the expected sales in units and the sales price for the budget period."

What is the difference between a static and a flexible budget?

OpenStax defines a static budget as a "budget prepared for a single level of activity for a given period," and a flexible budget as a "budget based on different levels of activity."