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Making a Budget


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Economics

One thing that every good money manager does is make a budget.

What is a budget? It's a means of keeping track of exactly how much money is coming in and exactly how much money is going out. If you own a company or you get an allowance, you want to know how much money you have at any given time. You don't want to run out of money, so you won't have any when you really need it. You also don't want to assume that you don't have any money when you really do have more than enough to pay for something.

So, people make budgets.

The most common way to make a budget is to write down (or use a computer to record) every single expense and every single income. Here is an example:

Mai-Ling's Babysitting Service

Date
Expenses
Income

6-13

$20

6-20

$20

6-27

Gasoline $20

So at the end of June, Mai-Ling has spent $20 but earned $40. She has $20 left over.

Now, this amount of money is relatively small. Mai-Ling can easily count just how much money she is spending and taking in, so she can easily know that she has that $20 left over.

But what about a large company, which has hundreds of expenses and many sources of income each month? That company especially needs to keep track of its money, going out and coming in, so the company can pay its bills. (Sometimes, the money can seem like it has to cover a lot of expenses. Some people call this stretching the money, because it seems like the expenses just keep piling up and the money doesn't seem like it is ever enough.)

So large companies keep budgets, too. Here is an example:

First National Toy Company

Date
Expenses
Income

3-24

$400

3-25

$400

3-26

$400

3-27

$600

3-28

$800

3-29

$800

3-30

$1500

3-31

Salaries $3,000

$1500

3-31

Rent $1,200

3-31

Electricity $800

3-31

Insurance $950

Total

$5,950

$6,400

The toy company earned $6,400 in sales in the last week of March. The company paid out $5,950 in expenses. So, the company made $450 in March, after all expenses are subtracted from income.

Why is it a good idea to know all this? What if the company wanted to buy a new computer system to calculate store receipts and that new computer system cost $2,000? If the company had only $450, then they'd have to buy the computer system using a credit card or some other method of borrowing money, like a loan. The company couldn't pay cash because enough wasn't available (unless the company had money stored away, which most companies usually do for just such an occasion).

Also, if the company has a few more months like March, when income is more than expenses, then the company can plan ahead and save up enough money to buy that computer system using cash, so the company doesn't have to borrow money and eventually pay more money (because a a credit card company or a bank that gives a loan or will charge interest).

A company will also keep a budget in order to see whether spending money on things like advertising is a good idea. Take a look at the graphic below. It is the same as the one above, with one important addition: It has a line for advertising. It also has a different number for sales income on March 31.

First National Toy Company

Date
Expenses
Income

3-24

$400

3-25

$400

3-26

$400

3-27

$600

3-28

$800

3-29

$800

3-30

$1500

3-31

Advertising $500

$2500

3-31

Salaries $3,000

3-31

Rent $1,200

3-31

Electricity $800

3-31

Insurance $950

Total

$6,450

$7,400

So the company spent $500 on advertising in March and got an extra $1,000 in sales income. It is not always the case, but you can probably say that the increase in sales came about because of the company's advertising. Maybe they advertised a toy sale or the arrival of a hot new product. Either way, they took in more money than they spent. And company managers will look at this budget and decide whether to advertise again, based on how much money they make or lose. (Of course, the only real way to know if it really was the advertising alone that resulted in the increase in sales is to try again the next month. If the other expenses are the same and the income is lower, then the advertising in March probably led directly to the increase in sales in March.)

For all of these reasons, keeping a budget keeps you aware of how much money you have, whether it's $20 or $20,000. Companies do it, and you can do it, too.


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