A budget is a financial document used to project future income and expenses.

A budget

A budget is a financial document used to project future income and expenses.

A budget is a financial plan for future activities. The budgets used in business often include a sales or revenues budget detailed by products or services, production budgets, budgets for each department in the company, cash budget, capital expenditures budget, and others. The combination of all the budgets is referred to as the company’s master budget or profit plan.

Budgets help management decide which activities it will undertake and how the company’s resources will be used. If the budgeted income statement and balance sheet coming out of the master budget are not acceptable, management can make the needed changes before the year actually begins. Budgets can also assist in controlling the actual costs, because managers realize that the costs of their activities will be compared to the budget.

Different budgets can be created depending on what particular aspect of the business requires focus. The process for preparing a monthly budget includes:

Listing of all sources of monthly income
Listing of all required, fixed expenses, like rent/mortgage, utilities, phone
Listing of other possible and variable expenses.

A company might have a master budget or profit plan for the upcoming year. This budget is either prepared annually or quarterly, it a group of many small budgets put together. Generally the layout of master budget depends on the size of the company. The master budget will include a projected income statement and balance sheet. Within the master budget will be operating budgets such as a sales budget, production budget, marketing budget, administrative budget, and budgets for departments. In addition there will be a cash budget and a capital expenditures budget.

A flexible budget is a budget that adjusts or flexes for changes in the volume of activity. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity. A rolling budget is also known as a continuous budget, a perpetual budget, or a rolling horizon budget.

A static budget is a budget that does not change as volume changes. If a company’s annual master budget is a static budget, the budget for sales commissions expense will be one amount such as $200,000 for the year. In other words, in a static budget the budgeted amount for sales commissions expense will remain at $200,000 even if the actual sales during the year are $3 million, $4 million or $5 million.

In contrast to a company’s static master budget, the company’s sales department might have a flexible budget. In the flexible budget, the sales commissions expense budget might be expressed as 5% of sales. In that instance, the department’s budget for sales commissions expense will be $200,000 when actual sales are $4 million, but it will decrease to $150,000 when actual sales are $3 million, and the budget will increase to $300,000 when actual sales are $6 million, and so on.

Forecast Budget

A forecast budget is where estimated figures are prepared which can then be adjusted when actual figures come in. In a forecast budget, figures from the previous year are often used as estimates for the current year. As more current figures are factored in, the forecast becomes more realistic.

Performance Budget

Performance Budget is where estimates are made on upcoming revenues and expenses. This is done by assessing each item on the income statement and giving it a percentage of expected change from the previous year.

Budgets can be based on the company as a whole if small, or by department if larger. Departmental budgets would then be combined to create a complete overview.

Performance budgets are often based on a service rate or on a specific project. As the company grows, performance budgets may be drawn up per project. Budgets are usually also created for anticipated projects and, as in the case of the forecast budget take into account an overview of expenses against anticipated revenue.

Cash Budget

A cash budget forecasts how cash will be used throughout the year. It is equal in importance to a results-based budget and usually focuses on the near future since the goals and strategies of a company can change with circumstances. The budget predicts future expenditures and cash receipts for a specific time period. This particular budget allows the company to gain some insight about when income will cover expenditure and when it might be necessary to seek external funds. Find out more about cash budgets.