What is a Budget?

A budget could be defined as the quantitative expression of any financial plan specified for a certain period. It could entail everything from planned sales volumes, resource quantities, costs and expenses, assets, liabilities to expected cashflows/profits. It basically expresses the strategic financial plans of businesses, organizations over defined time-frames. A budget can also be defined as the sum of money allocated for a particular purpose and the summary of intended expenditures along with proposals for how to meet them. It is the estimated revenue and expenses over a specified

[future] period of time, usually compiled and re-evaluated on a periodic basis.

Types of and Importance of Budget

  1. Master Budget
  2. Operating Budget
  3. Cash Flow Budget
  4. Financial Budget
  5. Static Budget

Master Budget: This is an aggregation of a company’s individual budgets which is designed to present the complete picture of such a company’s financial activity and health. This type of budget combines factors such as sales, operating expenses, assets, and income flows with the intention of allowing the company to set goals and evaluate [their] overall performance.

Operating Budget: The operating budget is like a forecast or an analysis of projected income and expenses over the course of a specified time period. In order to create an accurate analysis, operating budgets must account for such factors as sales, production, labor costs, materials costs, overhead, manufacturing costs, and administrative expenses. Businesses create this type of budget on either a weekly, monthly or yearly basis as it best suits them. And its use is to analyse whether the company is spending too much on supplies.

Cash Flow Budget: A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period. It can be useful in helping a company determine whether it’s managing its cash wisely. Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood of generating cash in the near future.

Financial Budget: A financial budget presents a company’s strategy for managing its assets, cash flow, income, and expenses. A financial budget is used to establish a picture of a company’s financial health and present a comprehensive overview of its spending relative to revenues from core operations. A software company, for instance, might use its financial budget to determine its value in the context of a public stock offering or merger.

Static Budget: A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue. A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage, regardless of how much inventory it moves in and out due to increased or decreased sales…

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