What Is a Line Item Budget and What Are the Advantages of Using One?

By Indeed Editorial Team

Updated February 22, 2021 | Published September 25, 2020

Updated February 22, 2021

Published September 25, 2020

A line item budget is one approach to helping a business develop a financial plan. Establishing and implementing a budget is crucial to running a successful business. Several small and average-sized businesses utilize line item budgets because they're simple to do and fast to build. In this article, learn more about what a line item budget is, the key components of a line item budget and the advantages of having one.

What is a line item budget?

A line item budget is a method used while creating and monitoring financial spending. Items are grouped by departments or costs to show which areas are using the bulk of the company’s funds. The line items show specific financial data for accounting purposes, but it's typically only used for expense reporting. It can show comparisons of financial information during past, present and future economic periods.

The line budgeting system will help businesses comprehend whether their incoming funds are capable of covering expenses. Companies can easily see whether a single item will exceed or come under budget.

For example, if a business notices a particular product they use impacts the balanced budget, they can pay close attention to that item and monitor trends to see if it affects the budget over time.

Related: Why Budgeting Is Important (Plus 7 Benefits of Budgeting)

Key components of a line item budget

Many small and medium-sized businesses use line item budgets because their expenses are usually low. It's also simple to create a budgeting system to keep track of these expenses.

Here are some key components of a line budget:

Lists expenses

When creating a line item budget, you can use make a group titled "Expenses." Gather comparable uses into groups, like office materials, employee compensation, professional development employees utilize, marketing and advertising. Each category should be on its own isolated line within the expenses.

Provides previous year expenses

It's essential to take a look back at the expenses of the previous year. Make a section titled "Past Year" and track the costs that happened within the year. For each group, track the amount the organization went through in that financial year.

Provides present year expenses

Comparing expenses from year-to-year helps with creating and adjusting budgets. Make a list titled "Present Year" and track all current expenses.

Reference what the organization used on expenses in the previous year and analyze the present and prior years' expenses in each budgeted group. Establish if it's appropriate to distribute more or fewer funds in each section for expenses based on that information.

Document the present budgeted sum for each grouped line. To a record of costs all through the year, create a section for every month. After January, or at whatever point your financial year begins, count up everything the organization went through in each segment and post it on each section. Prepare the same process for every month.

Advantages of a line item budget

Line item budgets offer many advantages for businesses, especially since you don't need to have a financial background to understand how to use and read them. Line-item budgeting offers decision-makers an easy and guided approach to budgeting.

Budget decision-makers can utilize a line-item budget to form specific financial choices, such as changing funding levels based on the supply of money for running the business successfully or by making cuts to costs based on changes in budgeting or organizational policies.

Here are some advantages of a line item budget:

Easy to develop

The benefit of a line item budget is that they're relatively easy to develop. Businesses don't have to depend on a finance department or accounting firm to understand expenses that a company has.

Businesses can ask departments to formulate their expenses by using their own line-item budget.

For example, in a human resource department, they calculate costs for benefits for employees. Office managers can create line item budgets for office supplies like paper and pens. Marketing professionals could have a line item budget of expenses that deal with sponsorships and advertising. Each department can see at a month of expenses at a time and see the funds spent on every line item.

Simple to figure out and interpret

One of the reasons line item budgets are often used, especially with those who are inexperienced with a financial background, is because it's relatively simple to figure out and interpret.

Throughout the year, you'll be able to see the amount of money you've used from the budget for every line item, and forecast whether you will remain on budget, have a surplus or operating at a deficit.

For example, Molly does not have experience with finances. Her manager has asked her to record expenses. Because it is easy to organize line items into categories, she can keep track of costs to make sure everything is recorded properly and she can easily see how the department budget is preforming.

Related: Balanced Budget: What It Is and How To Create It

Allocate expenses

Each organizational unit itemizes its costs and distributes an exact sum for each cost. Businesses utilize the budget from the final financial period to make the budget for the following fiscal period. They can alter costs to account for recurrent differences, regular contrasts and plan for inflation. As time passes, line item budgets provide businesses with factual data that illustrate patterns and openings for spare funds and resources.

For example, construction companies with higher labor costs during the spring and summer months can utilize information from line item budgets to discover ways to cut labor costs in less busy times of the year.

Related: Forecast vs. Budget: Differences and Steps To Forecast Budget

Plan for the future

You'll be able to look ahead to the future of the finances by analyzing your present spending with the past year's spending for every line item and enlarge or reduce the funds for each section from what course you see the company going with finances for the upcoming fiscal years. Examining line-item finances is simple to do since it's so clear. Each expense is placed and explained in order by each line.

For example, Jonathan is a marketing manager and he has been asked by his boss to look through his line item budget to determine if the marketing budget he needs for the next year and if he needs to increase it for the upcoming fiscal year. By looking at the line items in their respective column by each year, he can compare the previous and present years' expenses. The marketing manager can easily see if his budget will cover the prospective costs and that can help him plan for marketing initiatives or inflation for the upcoming year.

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