Balanced Budget: Definition, Example and How To Create One

By Hersh Chopra, MBA

Updated September 23, 2022 | Published February 25, 2020

Updated September 23, 2022

Published February 25, 2020

Hersh Chopra, MBA is a Certified Financial Coach and Knowledge Broker who helps individuals become debt-free and achieve financial security. Hersh has been featured in Yahoo! Finance, Influencive and Shoutout LA. He can be found at @hershchoprafinancialcoach.

A balanced budget is a financial plan allowing an individual or company to determine the revenue required to ensure they equal the organization's projected expenses. This tool can help organizations better understand their expenses and make positive financial and business decisions. Understanding how to create a balanced budget can help a company ensure it makes a profit by earning more revenue than its expenses.

In this article, we explain a balanced budget, review common budgeting terms, explore how to create a balanced budget effectively and provide an example for you to review. 

What is a balanced budget?

A balanced budget occurs when an organization's revenues either meet or exceed its projected expenses in a given financial cycle. This is usually based on the fiscal or calendar year depending on the organization's accounting policy. When a company finalizes its balanced budget, the organization reports either a "net break-even" or a "net surplus" financial outcome. 

For an organization to continue delivering results, it's important to create an achievable balanced budget, which allows for new spending and savings opportunities to help expand its reach. The financial outcome can depend highly on current economic conditions, typically resulting in a financial surplus or deficit. A country can experience multiple years of budget deficits following major economic catastrophes, such as a war or period of economic difficulty. 

Related: What Is a Business Budget (With an Example)

How to create a balanced budget

Creating a balanced budget involves reviewing current progress—what worked and didn't work—setting new goals to establish a reasonable threshold for both expenses and revenues and adjusting as needed to reach your goals. Here's a list of steps you can follow to create a balanced budget:

1. Review financial reports

Organizations maintain financial reports to track and measure year-over-year growth and progress and are a great indicator of an organization's financial past and future. An organization's financial statements, including income statements, balance sheets and cash flow statements, can help you better understand the company's past performance and financial longevity.

Related: What Goes On a Business Income Statement

2. Compare actual values to last year's budget

After reviewing financial reports, consider how the organization performed compared to last year's balanced budget. Identify whether there was a budget surplus or a deficit. Identify areas that did well and those that may benefit from improvement or revision. Consider how exceeding funds or going under-budget may impact the current balanced budget.

Related: What Is a Budget Estimate? (Plus 5 Common Types and Importance)

3. Create a financial forecast

You can create realistic goals to prevent further budget deficit outcomes based on last year's performance. Focus on reducing expenses and increasing revenue for the organization to support financial growth. You can also establish a level of priority among the various budget categories.

Related: Budget vs. Forecast: What's the Difference?

4. Identify expenses

Identify all expense categories the organization is liable for, including current and long-term expenses based on financial statements and contractual commitments. Review contracts or established payment terms to determine future liabilities. It's important to overestimate expenses to include a buffer for any unexpected costs that may arise while not exceeding potential revenue to ensure a balanced budget.

Related: Understanding Revenue and Expense Recognition Principles

5. Estimate revenue

Next, you can consider how revenues have actualized compared to previous budgets. Adjust and forecast revenue estimates based on outstanding collections, established contacts/policies and new revenue opportunities. With enough historical data, an average of past years' performance can be a good indicator of future performance, and you can reference the same month from past years. It's typically better to underestimate revenue projections than to miss projected targets. However, ensure that revenue projections exceed your estimated expenses to maintain a balanced budget.

Related: How To Use the Revenue Formula

6. Subtract projected expenses from estimated revenues

After estimating the organization's revenue, subtract total projected expenses from total estimated revenues. This can help ensure expenses either equal or fall below anticipated revenues. This indicates a budget surplus versus a deficit, which is better for the organization. If you notice a budget deficit, perform a deep analysis on all categories to identify opportunities to reduce expenses or increase revenues to bring the budget to a balance.

Related: What Are Operating Expenses? (With Examples)

7. Lock budget, measure progress and adjust as needed

Once you lock the budget, it's important to measure actual progress against the established budget. Variance analysis can help maintain accountability for each expense category. If costs in one category exceed the budgeted amount, identify another area for savings to keep expenses as close to or under the overall budget to achieve a balanced budget.

Related: 12 Effective Budget Strategies To Try

Balanced budget terms

Here are common terms for you to review to help you understand how to create and use a balanced budget:

  • Revenue: This is the gross income the organization generates. Revenues for a government would include federal and state income, payroll and sales taxes, Social Security, property taxes, excise taxes and more.

  • Expense: This includes any costs incurred by the organization. Expenses for a government would include medical expenses, Social Security benefits, national defense, interest on the national debt, transportation, education or any other costs of maintaining the infrastructure of the state or country.

  • Budget surplus: This happens when an organization's revenues exceed its expenses, meaning its earnings are greater than its spending.

  • Budget deficit: This happens when an organization's expenses exceed its revenues, meaning the organization is spending more money than it is earning.

Related: What Is Strategic Planning? Definition, Techniques and Examples

Balanced budget example

Here's an example of a balanced budget for a government entity:

Revenues (in billions)
Federal income taxes:$3,500
Business sales taxes: $2,750
Excise taxes: $2,000
Social Security taxes: $750
Property taxes:$500
Expenses (in billions)
National defense: ($3,400)
Medical expenses: ($2,900)
Education expenses: ($1,500)
Social Security benefits: ($250)

This balanced budget shows an outcome of a budget surplus. This means total revenues exceed expenses by $1,450 billion—or $1.45 trillion—demonstrating that the government entity in the example earned more than it spent during the year. If the net revenues were negative, meaning total expenses exceeded total revenues, this exemplifies a budget deficit.

If there was a budget deficit, it may require the government entity to review actual spending, identify opportunities to reduce expenses and increase savings or increase revenue to balance the budget.

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