A budget helps the organization to allocate the resources of the company to different departments and activities to manage the cash flows of the business in an effective way. There are many types of budget. One of them is the financial budget.
Let us understand the term.
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What is Financial Budget?
A financial budget in budgeting is predicting the incomes and expenses of the business on a long-term and short-term basis. Right projections of the cash flow help the business to achieve its targets in the right way.
Financial budget preparation includes a detailed budget balance sheet, cash flow budget, the sources of incomes and expenses of the business, etc. The evaluation of incomes and expenses is done on a monthly, quarterly, half-yearly or annual basis, depending upon the suitability of the organization. A financial budget is a very powerful tool to achieve the long-term goals of the business. It keeps the shareholders and other members of the organization updated about the functioning of the business.
Let us know why financial budgets are prepared.
Why Prepare Financial Budget?
The organizations prepare the financial budget to manage the cash flows in a better way. This budget gives the business a better control and efficient planning mechanism to manage the inflows and outflows. To prepare a financial budget, it is important to prepare the operating budget first. It is with the help of operating budget that the organization can predict the sales and the production expenses. Therefore, the organizations prepare the financial budget only after the different financing activities in the operating budget.
Different Sections of Financial Budget
The cash budget tells about the inflows and outflows of the business. On the other hand, the cash flow of the business keeps on changing and with that, the cash budget should also change. Making a cash budget is a dynamic process and not a static process. There has to be an immediate reflection of any change in the cash flow in the cash budget of the business.
Budgeted Balance Sheet
The budgeted balance sheet comprises of many other budgets. The major component of this budget includes production budget and its associated budgets.
Capital Expenditure Budget
As the name suggests, the capital expenditure budget is about expenses related to plant and machinery or any capital asset of the business. This budget determines the expenses that would be incurred if an existing plant is replaced or any new machinery is bought. Factors like depreciation, cost of the plant, life of the machinery, etc. are taken into account while preparing the capital expenditure budget.
Let us have a look at the financial budget preparation.
Financial Budget Plan
The financial budget plan comprises of following steps:
- Calculate the expected inflow
- Calculate the expected outflow
- Set the targets
- Divide the expenses into different categories
- Keep the track of components in budget
- Set up the ledger
The above points give an idea of how the financial budget plan is set. Different organizations may take different factors in considering while preparing the budget. However, the above points shall form part of any budget plan.
The financial budget provides a blueprint for the business to move forward. It addresses not only the financial aspects of the business but also checks the operational efficiency. The extra expenses are cut by emphasizing on cost reduction and improving the market share. With financial budgets, the organization is well prepared to meet the long-term and short-term expenses. A good financial budget helps in achieving the goals and objectives of the business in the shortest possible span of time.1–4