The budget forecasts the future activity of the company and helps in allocating the funds/resources to the different areas or departments of the business. The budgets help in measuring past performance and predict future performance in different areas.
In budgeting, there are different types of budget that help the business to maximize the utilization of its resources and increase its revenue. Let us have a look at different types of budget.
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Types of Budgets
The master budget is the sum total of the company’s budget that includes the allocation of funds to different activities of the business. It evaluates the cost centers within the organization and allocates funds by including different factors. The master budget is developed by including different factors like sales, working capital, operating expenses, income sources, etc. This budget ensures that the managers are working in line with the goals and objectives of the business.
Operating budget of the business involves costs related to the operational activities. The costs include production cost, overhead cost, manufacturing cost, labor cost, administrative cost, working capital, etc. The income flow includes the sales of the business.
Operating budgets are prepared considering all the above factors. This budget can be on a weekly, monthly, quarterly or even yearly basis. The operating budget ensures that the managers know their scope of work in proportion to the amount of funds allocated to the department. On this basis, the evaluation of a manager’s performance is possible.
A business is always in need of short term, medium-term and long-term funds. The financial budget ensures that the right types of funds are available whenever they are required. The aim of this budget is to manage the outflows with the inflows. The outflow is in the form of expenses and inflow is in the form of sales. Decisions like mergers and acquisitions depend on the financial budgets of the organizations. If the business has the desire to take over any company, its financial budget shall determine the value up to which the business can quote for acquiring another organization. In simple words, the financial budget describes the financial health of the business.
Cash Flow Budget
Cash flow budget is more about managing the cash of the business. The cash flow budget determines whether the accounts payable and accounts receivable are dealt with timely. It ensures that the inflow of the cash is regular and timely. This budget is important as it helps the managers to determine the period of cash shortage and accordingly take necessary action towards it. Cash flow budget also enables the business to know whether it would be able to handle new projects efficiently or not.
A static budget is one that remains the same even after the change in the factors that affect the budget preparation. A company that is seeing a constant drop or rise in sales may not change its budget allocation as it follows a static budget. Static budget presumes the input, output values of the future period and based on that allocation of resources is done. The results of the presumption of static budgets are very different from the actual outcome.
Budgets form an integral part of any organization. The different types of budget ensure that the right amount of funds are allocated to different departments or activities. Ignoring or making wrong budgets can prove to be fatal for the business as it can lead to efficient use of monetary resources. Based on the business requirements, different types of budgets must be prepared for the smooth running of the organization.1–4