What Is an Annual Budget? How They're Developed and Used

Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.

What Is an Annual Budget?

An annual budget lays out a company's projected income and expenses for a 12-month period. The process of creating an annual budget involves balancing out a business' sources of income against its expenses. In many instances, particularly for non-individuals, an annual budget is expanded to include a balance sheet and cash flow statement. Annual budgets are used by individuals, corporations, governments, and other types of organizations that need to keep track of financial activity.

Annual budgets are considered to be balanced if projected expenditures are equal to projected revenues. It is in deficit if expenditures exceed revenues, and it is in surplus if revenues exceed expenditures.

Understanding an Annual Budget

Annual budgets can apply to either a fiscal or calendar year. These budgets help their creators to plan for the upcoming year and make the necessary adjustments to meet their financial goals. Annual budgets help individuals to better manage their money. For corporations, governments, and other organizations, annual budgets are critical and often mandated for planning purposes with respect to sources of income and necessary expenses—assets, liabilities, and equity required to support operations over the one-year period; and cash flows used for reinvestments, debt management, or discretionary purposes.

Key Takeaways

• An annual budget is a plan for a company's projected expenditures over the course of a year.
• Annual budgets act as benchmarks against which an individual or company can measure progress and as tools to help better manage money.
• Budgets can be in balance (expenditures = revenues), in deficit (expenditures exceed revenues), or in surplus (revenues exceed expenditures).

Another prime role of an annual budget, typically broken down into monthly periods, is the enabling of budget versus "actual" performance comparisons. For example, if an individual has to dip into a savings reserve at the end of a month to pay a credit card bill, they could look at the annual budget items to find out where an actual expense exceeded a budgeted expense and make appropriate adjustments. For a sole proprietor to a large corporation alike, an internal annual budget is vital in keeping track of moving parts of a business to reach or surpass key financial objectives.