I recall sitting in a board meeting for a non-profit I was involved with years ago and the budget process came up. Specifically the word ‘budget’ meant to different things to different board members.

An Entrepreneur, Cost Accountant & Bureaucrat Walked Into a Budget Meeting

For the entrepreneur on the board, it was a transient document which provided a guide and outline to an investor but to be discarded when better information became available. There was a cost accountant on the board who spent his life in manufacturing. A budget, to him, was a technical specification. How much was to be produced, when and what cost.

Coming from the public sector, I saw a budget as an authority to expend. Once it was agreed to, the respective managers could then run their businesses within the budget to accomplish their program objectives. It was a tool to manage responsibility.

After a few minutes discussion we eventually landed on what ‘budget’ meant to the organization. Nevertheless, throughout the discussions, I could feel the continual-pull of these perspectives.

Authority X Openness

Thinking about the confusion from that meeting, the following model could have helped. It is based on two dimensions: Authority X Openness.

Authority are the external factors influencing how a budget is prepared and what structure or components it must contain. At one extreme is a legislative mandate describing these details. For example, one international organization I am aware of was compelled by its participating states to include a staff-post table in its budget. This table was a relic from a different era of organizational control. At the other end of the continuum is a ‘back of envelope’ budget. This is one that has no authority and is a guess-timate. The entrepreneur thought of budgeting this way; “this is the plan until we have better information”.

Openness is who gets to see the final product or contribute to its preparation. The cost accountant was highly protective of his production budgets and for good reason. They represented a competitive advantage for his company and was the basis for its pricing strategy. Conversely, most government budgets are published online and citizens can examine a surprising level of detail. However, the preparation of the budget may not be so open depending upon government traditions [1].

One of the hallmarks of the Westminster System [2] are the concepts of Committee of Supply and budget secrecy. The tradition is that the budget remains a secret until it is released in Parliament. In the UK, ministers have had to resign because of a breech of secrecy [3]. In Canada and since then, there has been a greater focus on budget-preparation openness. For example, soliciting suggestions from taxpayers for their priorities

This is NOT the Budget You are Looking For

With apologies to Obi-wan Kenobi [4], the above description is applied to the general category of budgets. The most open government [5] likely still has guess-timates that will never be made public either because they are a work in progress or fall under the cloak of Cabinet-secrecy. Conversely, while a manufacturing company may protect its manufacturing plans it may also issue pro forma estimates or budgets as part of a business plan for investors.

Additionally, ‘budget’ is a generic term for a host of planning documents. Terms such as ‘Master Budget’ would amalgamate subordinate cash, production or revenue forecasts into a unified ‘budget-document’. For a list of common budgets, see the following annex.

Annex: These Are the Budgets You May be Looking For

Common Types of Budgets

‘Budget’ is both a collective and a common noun.  It is a handy catch all term for a number of inter-related plans.  Some of the budgets your organization may develop include [6]:

• Master budget: overall financial and operating plan.  Consolidates subordinate plans/budgets based on the particulars of an organization. A manufacturing firm has sales, production and inventory plans.  A social services agency a program budget. 
• Operating budget: planned operations typically presented in a line-item format, e.g. Revenue, Expenses with sub-categories such as salaries, supplies, types of revenue, etc. 
• Sales/Revenue budget: Expected inflows to the organization.  There maybe sub-budgets with product line or major customers/market segments.  A non-profit may produce an equivalent budget but focusing on donors or fundraising activities.
• Production/Program budget: production of products/outputs and/or programs or their elements.  The subordinate elements may be based on the operating budget (e.g. salaries, supplies, sundry expenses) or be specific to the program.  Organizational capacity (e.g. number of beds, staff hours) may provide an upper limit to this budget.  These constraints are addressed through the operating or capital budgets. 
• Manpower/Staffing budget: for human resource intense organizations (e.g. a hospital), the number and type of staff/contractors will be a key-input to consider.  This budget will result in an FTE or available hour output which can be used for operational planning. 
• Cash budget: planned cash receipts and disbursements.  This budget is of particular interest to the finance and senior management levels as they may need to know when to draw down reserves or borrow when disbursements exceed receipts (e.g. a grant is paid only on completion of a contract).
• Project/Capital budget: While the above types tend to be fiscal year focused, a capital budget is typically project focused.  For a small non-profit, this budget will be an exception (e.g. a one-time expansion).  For larger organizations, there are likely a number of small to large capital projects occurring continuously (e.g. the maintenance and expansion efforts of a hospital).  This type of budget interfaces with the above either during the project phase (e.g. the need for cash, staff on projects) or upon completion (e.g. changes to operating costs such as staff hired, increased utilities, etc.).  The latter concept is known as budgeting for the “Total Cost of Ownership”.

Common Ways to Budget

If the above list cast ‘budget’ as a noun, the following uses it as a verb:

• Incremental budget:  last year’s actual figures are adjusted to obtain the current year’s budget.  It is a common method because it is simple; it is useful if the cost drivers are not subject to change [7].
• Zero-based budgeting: starts with the assumption of zero with managers justifying every single expense. Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered absolutely essential. Ideally it is used BEFORE there is an urgent need for cost containment as it is time and cost intensive [7].
• Flexible budget: the amounts within the budget scale according to an external measure.  An immunization program and their associated costs may increase or decreased based on funding received.  Some costs are fixed, variable or mixed making this type of budget more challenging.
• Responsibility budget: the portion of one of the above budgets in which a single person or sub-unit of the organization is responsible.  Often there is also a delegation of authority for spending, signing contracts, etc. that goes with this budget. 
• Results based budget: Formulation of budgets that are driven by a number of desired results that are articulated at the outset of the budgetary process and against which actual performances ate measured at the end of the period of execution. [8]
• Activity based budget: activities that incur costs are recorded, analyzed and researched. It is more rigorous than traditional (incremental) budgeting processes.  It is also expensive and better suited to for-profit organizations who are more disciplined about product selection and cost-management [9].
• Budget periods: although most budgets are built on a yearly basis, many are created to match actual economic activities to reduce administrative costs.  Thus, a theatre group may have a semi-annual budget (e.g. 2 per year) for each of their seasons.  Many international organizations have a bi or tri-annual budget (e.g. 2- or 3-year budget) because of the cost to approve the budget and to provide funding-stability for the work of the organization. 
• Time Frames: If the fiscal year of an organization crosses a calendar year then year descriptions are hyphenated, e.g. 2098-2099 for the period of April 1, 2098 to March 31, 2099.  Year descriptions can become confusing when a budget contains multiple years.  Current-Year, Budget-Year and Out-Year(s) are often used to differentiate these respectively. 
• Rolling Budgets: Traditionally a budget is set for a defined period (e.g. a fiscal year) and then replaced for the start of the next period.  A rolling budget adds a new budget period after the most recent period has been completed. The budget always extends a uniform distance into the future. However, it also requires a considerable amount of budgeting work in every accounting period to formulate the next incremental update. Thus, it is the least efficient budgeting alternative, though it does focus ongoing attention on the budget [10].

Notes and Further Reading

1. To read more on this, see the excellent work done by the Open Budget Survey. New Zealand leads the pack with a score of 87/100. The US beats out Canada likely because of the Parliamentary traditions. Hallmarks of an open government budget include:
   1. Pre-Budget Statement: Released at least one month before the Executive’s Budget Proposal is submitted to the legislature for consideration.
   2. Executive’s Budget Proposal: Publicly released while the legislature is still considering it and before it is approved.
   3. Enacted Budget: Released no later than three months after the budget is approved by the legislature.
   4. Citizens Budget: Released within the same timeframe as the underlying Executive’s Budget Proposal or Enacted Budget.
   5. In-Year and Mid-Year Reviews: Must be released no later than three months after the reporting period ends.
   6. Year-End Report: Released within 12 months after the end of the fiscal year.
   7. Audit Report: Released within 18 months after the fiscal year end.
2. Wikipedia: Westminster system.
3. Thorsteinssons LLP: BUDGETS AND SECRECY: THEN AND NOW.
4. Star Wars: These are Not the Droids You Are Looking For. Just in case you have never seen the movie!
5. For an example of an open budget, visit the City of Edmonton’s budget site. There are likely cities even more open but this is a good representation.
6. This of course is not an exhaustive list.  Because as a noun, ‘budget’ is not too fussy who it hangs out with, a ‘production-budget’ and ‘golf-budget’ have equal validity.  There is organization-specificity as to what types of budget it requires.  A golf manufacturer could easily have both of these!
7. Adapted from: “Types of Budgets …” corporatefinanceinstitute.com…/types-of-budget-methods.
8. p. 49; Prom-Jackson, Sukai. “RESULTS-BASED MANAGEMENT IN THE UNITED NATIONS SYSTEM; HIGH-IMPACT MODEL FOR RESULTS-BASED MANAGEMENT; Benchmarking Framework, Stages of Development and Outcomes,” 2017. The UN has done extensive work in the definition of results based management including budgeting. 
9. Adapted from: Liberto, Daniel. Investopedia. www.investopedia.com/terms/a/abb.asp.
10. Adapted from: Accounting Tools. “Types of Budgeting Models.” accountingtools.com/…budget-models.