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Budget Definition and its Purpose. Types of Budgets

Category: Financial Control Management

Budget Definition and its Purpose

Budget a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.

Purposes of budgeting systems:

— Planning

— Facilitating Communication and Coordination

— Allocating Resources

— Controlling Profit and Operations

— Evaluating Performance and Providing Incentives

Using a budgeting system companies can:

— Improve cash flow;

— Optimize product portfolio;

— Minimize salary adjournment;

— Increase the operational level;

— Eliminate breaks in production process;

— Stabilize debts level;

— Precisely determine the real financing needs.

Types of Budgets

Long-Range Budgets — capital budgets dealing with the acquisition of building and equipment normally cover several years.

Continuous or Rolling Budget — this budget is usually a twelve-month budget that rolls forward one month as the current month is completed.

Operating Budget — the annual operating budget may be divided into quarterly or monthly budgets.

Budgeting comprises 3 obligatory financial statements:

— Income Statement

— Cash Flow Statement

— Balance Sheet

Budgeting comprises 2 components:

Operational Component

— Sales Budget

— Commercial Expenses Budget

— Production Budget

— Inventory Budget

— Materials Budget

— Labour Budget

— Production Indirect Expenses Budget

— Overheads Budget

— Income Statement

Financial Component

— Investment Budget

— Balance Sheet

— Cash Flow Statement

There are some principles to be taken into consideration when developing a Budget. Budgeting is reasonable when:

— There are realistic objectives

— There is a profitable business

— There is a financial diagnosis as base for determining trends

— There is an integrity with Management Informational System

— You can use what-if analysis

Normally it is figured monthly for the first year of activity, quarterly for the second year and annually for the rest of the years.

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