A budget (from old French baguette, purse) is generally a list of all planned expenses and revenues. It is a plan for saving and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.
In summary, the purpose of budgeting is to:
- Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out.
- Enable the actual financial operation of the business to be measured against the forecast.
Types of budget
Following are various types of budget.
The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.
Product oriented companies create a production budget which estimates the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material.
Cash Flow/Cash budget:
The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.
The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.
The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.
The Revenue Budget consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.
A budget type which include of spending data items
Report that provides the basis for controlling (monitoring and revising) activities of an organization by comparing actual performance (actual sales or costs) with budgeted performance (budgeted sales or costs). A budget report has columns for budgeted and actual amounts. The difference between the two is the Variance.
A budget report compares actual to budgeted amounts.
- Prepare a Revenue Budget. The revenue budget is the planned revenues from various sources such as sales of goods, sale of intangibles etc. Be realistic when estimating revenue. Set up two revenue budgets in the initial stage of planning the budget. Revenue Budget A is the known budget. It includes all revenue that each department knows will exist. Budget B can be called a “Contingency budget” which should address the contingency situation of receipt and non-receipt of funds from planned sources. The contingency budget is important to face any unplanned event in the course of execution of the business.
- Prepare an Expenditure Budget. Prepare an expenditure budget after calculating the revenue budget. The expenditure budget must always include a “contingency” item for emergency or unexpected expenses. Also prepare both a “Firm budget” and a “Contingency budget”. The “Contingency Budget” must be able to answer, “What if scenario to incur additional expenses””What if an emergency occurs?” “What if. . . .?” Additionally break down the expenditures into fixed and variable expenditures. A fixed expenditure does not change (for example, rent). A variable expenditure varies and not fixed.
- Prepare an Overall Budget. Be sure that all the concerned departments review the initial budget. Upon their approval, perpare overall budget. The overall budget must include all the departmental budgets. Various programs and activities must be controlled within the allotted budget limits if time and money and must be integrated so as to achieve the mission of the organization.
- Prepare a Budget Report. A budget report should compare the actual to the budgeted amounts. Prepare and analyze your budget report systematically so that the budget could be controlled effectively. While preparing the budget report, ensure all the information is posted for the correct periods and to the correct account. Incorrect period postings will cause a distorted picture.
- Never submit an unaudited budget report. Budget must be as accurate as possible and inaccurate information will prove to be a disaster. Once the budget report is prepared, analyze as to why the variances from the planned budget have occurred and suggest appropriate actions that need to be carried out. Keep in mind that the budget is a planning tool, and the budget report is the controlling tool.