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 measure past performance and predict future performance in different areas.
In budgeting, there are different types of budgets that help the business maximize the utilization of its resources and increase its revenue. Let us have a look at different types of budgets.
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 having different factors. The master budget includes 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.
Refer to Master Budget for a detailed article.
The operating budget of the business involves costs related to 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.
We can make Operating budgets 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 number 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 need them. This budget aims to manage the outflows with the inflows. The outflow is in the form of expenses, and the inflow is in the form of sales. Decisions like mergers and acquisitions depend on the financial budgets of the organizations. If the business desires 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 business’s financial health.
Cash Flow Budget
A 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 cash is regular and timely. This budget is important as it helps the managers determine the cash shortage period. And accordingly, take necessary action towards it. A 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 a type of budget that remains the same even after a 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. A static budget presumes the input, and 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.
Continue reading Static Budget
It is a budget prepared for a specific program or project. And therefore, it is also known as a project budget. Since a business has many ongoing projects together simultaneously, it helps in controlling each project efficiently. It determines the allocation of funds on a particular project that facilitates strong decision-making.
Refer Program Budget
A performance budget measures the productivity of operations by analyzing the purpose of spending money. It focuses more on the operations that contribute more to profitability. It helps in periodic evaluation easier and thus controls any inefficiency on time. An example of performance budgeting is comparing the change in the production of two periods, before and after providing training.
Keep reading Performance Budget
It is a type of budget that the company prepares in the continuity of the existing budget. The business organization keeps on adding more periods to the existing budget, making it quite easy to prepare. It keeps changing with the addition of a new period. And thus, it has up-to-date data, which makes it more relevant for the purpose of analysis.
Visit Rolling Budget for more
It is a budget prepared on the basis of recurring incomes and expenses and non-recurring expenses. It follows the concept of conservatism, and hence, it does not consider non-recurring incomes. This budget is just another name for the master budget.
Read more at Comprehensive Budget
A fixed budget is a budget for a particular level of activity. It does not consider any changes and has a rigid approach. For example, the company forecasts the sales to be $200,000 and hence fixes the incentive for the salesperson of $20,000. Now, if the actual sales differ from the forecasted sales, a fixed budget does not provide the opportunity to modify the same.
See Fixed Budget for more.
In contrast to a fixed budget, a flexible budget provides freedom of modification as per the change in the level of activity.
Read more about it at Flexible Budget
Budgets form an integral part of any organization. The different types of budgets 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. A business must prepare different types of budgets on the basis of its requirements for the smooth running of the organization.