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.