Whenever someone is working on a financial goal, one of the topics that comes up is working with or within a budget. The thing is, there are three distinct types of budgets, each with its own structure and approach. This topic 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’re working on.
Most of the time, when someone talks about their budget, they are referring to an operational budget. An operational budget is a budget that tracks ongoing financial activity. It is the daily budget of a company or a family.
An operational budget tracks both income and expenses. The purpose of this document is twofold. First, by tracking all financial movements, or “cash flows”, a person can get a much clearer picture of the financial situation. Hopefully this image will allow a person to make the desired changes efficiently. Second, this budget emphasizes the difference between revenues and expenditures. In a business, it is profit; for a family, it is “fun” money. What to make of this difference is another topic, for another time.
A project budget focuses on controlling 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 someone delivers “on budget”, that’s the kind of budget they’re talking about.
The key is to track expenses, allowing you to make the right decisions. Questions about buying resources, hiring people, buying advertising are usually discussed in this context. Income is usually fixed at the start of the project or available in clearly defined amounts. Often, a project budget refers to an operational budget.
A goal budget is where a target amount of money is set and the income amount is tracked. If expenses are tracked, they are only tracked as an impact on revenue. For example, a fundraising project is managed this way.
All expenses tracked in this budget are simply expenses directly related to earning income. For example, a fundraiser can buy envelopes to hand out so people can mail in donations. The main objective is the growth rate of the amount saved. Again, this effort can be linked to other more comprehensive activities, such as a family saving for a vacation as part of their overall budget.
Have the right structure
When someone creates a budget, having the right goal is an essential part of success. Understanding the different types of budgets can really help focus correctly.