Three Types of Budgets

download (90)Whenever someone is working on a financial goal, one of the topics that comes up is working with or within a budget. The fact is that there are three distinct types of budgets, each with their own structure and approach. This subject is definitely not a “one size fits all” topic. Understanding the different types of budgets will help you track the right information for the task you are working on.

Operational Budget

Most of the time when someone is talking about their budget, they are referring to an operational budget. An operational budget is one that tracks ongoing financial activity. This the day-to-day budget of a business or a family.

An operational budget tracks both income and expenses. The purpose of this document is two-fold. First, by tracking all financial movement, or “cash flow”, a person can get a much clearer picture of the financial situation. Hopefully, this picture will allow a person to make any desired changes in an efficient manner. Second, the focus of this budget is on the difference between income and expenses. In a business, this is the profit; for a family, this is the “fun” money. What to do with this difference is another topic, for another time.

Project Budget

A project budget focuses on controlling expenses. The idea is there is a certain fixed amount of money available to pay for everything. By tracking expenses, a person can make sure that everything will be covered. When a person delivers a result “on budget”, this is the type of budget being discussed.

The key is to track expenses, enabling decisions to be made correctly. Questions about buying resources, hiring people, purchasing advertising are typically discussed in this context. Income is typically fixed at the beginning of the project or available in clearly defined amounts. Often, a project budget references an operational budget.

Goal Budget

A goal budget is where a target amount of money is set and the amount of income is tracked. If expenses are tracked, they are done so only as an impact on the income. For example, a fund-raising project is handled this way.

Any expenses tracked in this budget are simply expenses directly related to getting income. For example, a fund-raiser may purchase envelopes to distribute so that people can mail in donations. The primary focus is the rate of growth of the amount saved. Again, this effort can be related to other, more comprehensive activities, such as a family saving for a vacation as part of their overall budget.

Having the Right Structure

When a person is creating a budget, having the right focus is a critical element of success. Understanding the different kinds of budgets can really help setting the emphasis correctly.