The English word budget is derived from the Latin word “bulga,” meaning a leather bag or backpack used to carry food supplies. Later, budget was expanded to mean not only the container but also what it contained.
"Budget" refers to a financial plan that estimates an entity's revenues and expenses for a defined period of time , usually annually. In a business, government, or personal context, a budget is an essential tool for financial management , helping to control spending, forecast cash flows, and direct resources to priority areas.
How did the budget come about?
Budgeting began in England . As early as 1760, the Chancellor of the Exchequer presented the national budget to Parliament at the beginning of each fiscal year. The purpose was to check the king's power to levy taxes and control the spending of money by public officials. In 1837, the budget was enacted by the Reform Act.
The first corporate budget: General Motors
Donaldson Brown was a pioneer in corporate budgeting at two companies, DuPont, and most famously, as CFO of General Motors under legendary CEO Alfred P. Sloan.
In 1914, Brown, a financial genius, was asked to prepare a report on the performance of various operating departments of DuPont, a large American polymer conglomerate. It was at this point that he developed the procedure now known as the DuPont formula . This involved dividing items such as plant and other fixed investment items , as well as amounts tied to working capital , into several categories , such as raw materials, work in process, finished goods, accounts receivable, and required operating cash balances.
This detailed analysis allowed managers to better understand the areas hong kong phone number data where the company is performing well and where it can improve , whether by increasing profit margins, optimizing the use of assets, or adjusting the capital structure.
Almost parallel to the activity taking place at General Motors, in 1922, a book on corporate budgeting by James Oscar McKinsey was released . McKinsey became the founder of the famous consulting firm that bears his name. But his book, Budgetary Control, published on June 20, 1922, established McKinsey as the father of corporate budgeting .
The importance of budget
The importance of budgeting is a financial lesson that cannot be overstated. When you’re starting out on your financial journey, following a budget can help you practice basic financial habits.
A budget helps create financial stability . By tracking expenses and sticking to a plan, a budget makes it easier to pay bills on time, build an emergency fund, and save for major expenses like a car or home. Overall, a budget puts a person on a more solid financial footing , both day-to-day and in the long term. Green Belts are trained to identify and eliminate waste in processes. By applying these techniques, unnecessary costs can be cut, making budgeting more efficient.
Still not convinced? Below are five good reasons why everyone should create and stick to a budget.
Helps you work towards long-term goals
A budget helps you figure out your long-term goals and work toward them. If you just drift through life aimlessly, throwing your money at every shiny new object that catches your eye, how will you ever save enough money to buy a car or put a down payment on a house?
A budget forces you to map out your goals, save money, track your progress, and make your dreams a reality . By seeing how much money you earn and how much money you spend through a budget, you can create a map of where you need to go to achieve your goal, whether it’s buying a house in a few years or going to graduate school.
Budgeting can also be used for short-term goals . If that new Xbox game or cashmere sweater in the store window is out of reach right now, a budget can help you figure out what you need to do to achieve that goal.
If you want to organize yourself with a planning method, check out our course on OKR: what it is and how to implement it . Through it, you can set goals and objectives. The methodology is normally used for companies, but it can also be a useful way to plan your own finances.
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