Anytime someone is working on a financial goal, one of the issues that comes up is working on or within a budget. The fact is that there are three different types of budgets, each with its own structure and focus. This theme is definitely not a “one size fits all” theme. Understanding the different types of budgets will help you track down the right information for the task you’re working on.
operating budget
Most of the time, when someone talks about their budget, they are referring to an operating budget. An operating budget is one that tracks ongoing financial activity. This is the day-to-day budget of a company or a family.
An operating budget tracks both income and expenses. The purpose of this document is twofold. First, by tracking all financial movements, or “cash flow,” a person can get a much clearer picture of their financial situation. Hopefully, this image will allow a person to make the desired changes efficiently. 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 “fun” money. What to do with this difference is another topic, for another time.
The project budget
The budget of a project focuses on the control of expenses. The idea is that there is a certain fixed amount of money available to pay for everything. By tracking expenses, a person can ensure that everything will be covered. When a person delivers an “on budget” result, this is the type of budget being discussed.
The key is to keep track of expenses, which allows you to make decisions correctly. Questions about buying resources, hiring people, and buying advertising are often discussed in this context. Revenues are usually fixed at the start of the project or are available in clearly defined amounts. A project budget often refers to an operating budget.
target budget
A target budget is where you set a target amount of money and track the amount of income. If expenses are tracked, they are tracked only as an impact on revenue. For example, a fundraising project is handled in this way.
All expenses recorded in this budget are simply expenses directly related to earning income. For example, a fundraiser might purchase handout envelopes so people can send donations in the mail. The main focus is the growth rate of the amount saved. Again, this effort can be tied to other, more comprehensive activities, such as saving your family for a vacation as part of your overall budget.
Have the correct structure
When a person is creating a budget, having the right approach is a critical element for success. Understanding the different types of budgets can really help get the emphasis right.