What is the primary purpose of a budget in financial planning?

The primary purpose of a budget in financial planning is to outline projected revenues and expenses. A budget serves as a detailed plan that quantifies the expectation of future income and expenditures for a specific time period. This planning tool helps organizations set financial goals, allocate resources effectively, and make informed decisions about spending and investments. By providing a clear framework for financial expectations, a budget supports management in balancing income and expenses, thus ensuring financial stability and guiding operational strategies.

While tracking actual results against forecasts is important for performance evaluation, it is a subsequent step that comes after a budget has been established. Securing funding from investors is typically influenced by a well-prepared budget but is not the primary purpose of the budget itself. Establishing company policies may be a function of the budgeting process, but this is more about governance and internal structure rather than the core role of a budget in financial planning. Therefore, the essence of budgeting is fundamentally rooted in projecting revenues and expenses, which aligns with the overall goals of financial management.