A budget helps an organization allocate the resources of the company to different departments and activities and manage the cash flows of the business in an effective way. There are many types of budgets. One of them is a financial budget.
First, let’s try to understand the term a bit better.
What is a Financial Budget?
A financial budget in budgeting means predicting the income and expenses of the business on a long-term and short-term basis. Accurate projections of cash flow help the business 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 on the suitability of the organization. A financial budget is a very powerful tool to achieve the long-term goals of any business. Importantly, it also keeps the shareholders and other members of the organization updated about the functioning of the business.
Let’s explore why financial budgets are prepared.
Why Prepare a Financial Budget?
Organizations prepare a financial budget to manage the cash flows in a better way. This budget gives the business better control and provides a more efficient planning mechanism to manage the inflows and outflows. To prepare a financial budget, it is important to prepare the operating budget first. With the help of the operating budget, the organization can predict the sales and production expenses. Therefore, the organizations prepares a financial budget only after planning the different financing activities in the operating budget.
Different Sections of a Financial Budget
The cash budget contains information on the inflows and outflows of the business. On the other hand, the cash flow of the business continues changing and with that, the cash budget should also change. Making a cash budget is a dynamic process, not a static one. There must 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 many other budgets. The major component of this budget includes the production budget and its associated budgets.
Capital Expenditure Budget
As the name suggests, the capital expenditure budget relates to 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 when preparing the capital expenditure budget.
Let’s take a closer look at the financial budget preparation.
Financial Budget Plan
The financial budget plan is comprised of the following steps:
- Calculate the expected inflow
- Calculate the expected outflow
- Set the targets
- Divide the expenses into different categories
- Keep track of components in the budget
- Set up the ledger
The above points give some idea of how a financial budget plan is set. Different organizations may take different factors into consideration while preparing the budget. However, the above points will 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 cost reduction and improving the market share. In terms of 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.
Quiz on Financial Budget
Let’s take a quick test on the topic you have read here.