A Balanced Budget: What It Is and How to Create One

By Indeed Editorial Team

Published November 8, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A budget is an essential tool for any business, providing a foundation on which companies can make financial decisions. If you work in human resources or a management position, one of your goals may be to balance a budget. Understanding how to create one can help you coordinate revenue and expenses to ensure there isn't a deficit, avoiding any unnecessary debt. In this article, we discuss what balanced budgets are, review common financial terms, explain what makes a successful budget and how to create one, and provide a glossary and example for better understanding.

What is a balanced budget?

A balanced budget occurs when a company's total revenue either meets or exceeds its projected expenses in a given financial cycle, which is usually based on a fiscal or calendar year, depending upon the company's accounting practices. To produce a budget that is balanced, it's often necessary for the company to create a clear and concise financial plan that includes projecting all revenue and expenses for the upcoming year as accurately as possible. When it balances, the company reports either a net break-even or a net surplus financial outcome.

Common budget terms

Budgets often use a common set of expressions. Here are four standard terms that it can be helpful to know:

Revenue: This is the total money coming in from all sources, including product sales, services, interest, and investments. Revenue can also include other forms of income, such as any taxes or fees that a company collects.
Expenses: This is the total amount of money spent in a fiscal year. Expenses typically include overhead costs, employee salaries, and operational costs.
Surplus: This is when revenue is more than the amount spent in a fiscal year. The surplus can pay down debt, fund new initiatives, or create a rainy-day fund.
Deficit: This is when spending exceeds revenue in a fiscal year. A business may cover a deficit by transferring money from other areas or borrowing from a lender, such as a bank or credit union.

What makes a successful budget?

A well-thought-out budget is essential for businesses to maintain a healthy cash flow and prevent financial instability. For a budget to be successful, it's necessary for you to set realistic expectations for the company's revenue and expenses. You can do this by analyzing the past financial statements of the company you work for to get an accurate picture of where the money has been coming from and going to.

To create a balanced budget, analyze the company's current progress and performance and its expected future growth. This may help you understand the company's financial situation and make better decisions about where to allocate resources.

How to create a balanced budget

Here are eight steps you can take to balance a budget:

1. Review financial statements

Financial statements give a clear overview of a company's financial position and performance. They include balance sheets, profit-and-loss statements, and cash flow statements. Reviewing these statements can help you better understand the company's revenue and expenses.

2. Compare this year's budget to last year's

Reviewing the company's budget from the previous year can help you know where the company typically generates and spends money. This examination can also reveal what areas may require more attention. It can help you understand the company's financial health and ensure spending is for essential items.

3. Create a financial forecast

Using the data from last year's budget and the current financial situation, you can create a forecast for the upcoming year. This gives you an idea of what you can expect the revenue and expenses to be. Focus on reducing or eliminating costs in areas that are not essential and increasing revenue in areas with potential.

4. Identify expenses

Identify all the company's expenses, including overhead costs, employee salaries, and operational costs. Review contracts and established payment terms to find future liabilities and expenses. Doing this can help you understand what the business is spending its money on and where it can make cuts. Consider ways to reduce costs and increase efficiency in the company's operations.

5. Estimate revenue

Estimate the revenue for the upcoming year by analyzing the company's past performance. Look at sales figures, interest income, investments, and other sources of income. Use this information to create a realistic estimate of the company's revenue for the upcoming year. Make sure that the revenue projections exceed the estimated expenses to ensure a strong budget.

6. Subtract projected expenses from estimated revenues

Once you have the projected revenue and expenses for the upcoming year, you can subtract the projected expenses from the estimated revenue. This can give you a clear idea of whether you expect to run a surplus or deficit in the budget. If the revenue exceeds the expenses, you have a surplus. If the expenses exceed the revenue, you have a deficit.

7. Make the necessary adjustments

If the projected expenses exceed the projected revenue, it may be necessary for you to make some adjustments to the budget to keep it balanced. One way to do this is by cutting costs in some areas or increasing revenue in others. Another option is to take out a loan or line of credit to cover the shortfall.

8. Lock the budget, measure progress, and adjust as necessary

Once you have completed the budget, it's important to lock it in place and measure the company's progress against it regularly. Variance analysis can help you identify areas where you're over or under budget. If you find you're consistently over or under budget in certain areas, make the adjustments to the budget to account for this.

Glossary of terms

Here are four key terms to know when creating and working with balanced budgets:

Revenue

This is the gross income the company generates. Revenues for a government include federal and provincial income and payroll. It also includes sales taxes, property taxes, and excise taxes.

Expense

This includes all the money a company spends to keep things running. For a government, expenses include interest on the debt, federal and provincial income taxes, transportation, education, and infrastructure spending. It also includes military spending and national defence.

Budget deficit

A budget deficit occurs when a government's total expenses exceed its total revenue. This results in the government having to borrow money to cover the shortfall. It can also lead to higher taxes and cuts in government spending.

Budget surplus

A budget surplus occurs when a government's total revenue exceeds its expenses. This leaves the government with extra money to pay down debt, build reserves or return it to taxpayers. It can also lead to lower taxes and increased government spending.

Example of a balanced budget

Here's an example of what a successful budget may look like for a government entity:

Revenue (in billions)

Federal income taxes: $3,500

Business sales taxes: $2,750

Payroll taxes: $2,200

Provincial income taxes: $1,250

Total revenue: $9,800

Expenses (in billions)

Social security: $3,000

Interest on debt: $700

Medical care: $1,200

National defence: $700

Transportation: $250

Education: $500

Total expenses: $6,350

Net revenue (surplus): $3,450

In this example, the budget results in a surplus. The total revenue exceeds the total expenses by $3.45 trillion, so the entity in the example earned more money than it spent during the year. So the government has balanced its budget and borrowed money to cover its shortfall. If the net revenue were negative, meaning total expenses exceed total revenue, then the government faces a budget deficit, which may require them to either raise taxes or cut spending to increase revenue and balance the budget.