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.
