A profit is when the money a business earns is more than the money it invested. An increase in profit means the business is growing or staying financially healthy. Companies use profit estimates to plan for new equipment purchases, relocation, add staff or provide staff bonuses or raises.
A business operating budget highlights a company’s projected revenue and expenses over a specific period. An operating budget may include capital costs, nonoperating expenses, fixed costs or variable costs to determine whether a company is spending according to its overall budget plan. Management teams typically prepare these at the beginning of the financial, and they update operating budgets regularly to forecast the company’s operations for consecutive years.
All the company’s other departmental budgets form the master budget. Some of the information in this budget includes the company’s financial plans, departmental financial statements and cash forecast for a period. Financial managers often use these budgets to determine the needs of each area of the company, so it can achieve its overall goals.
Typically, this budget goes through a long process of evaluation to make sure each area gets a fair share of the allocation. Once the budget goes through these assessments and adjustments, the company’s finance department presents a final budget and distributes the funds to specific business activities.
A static budget is an estimation of a company’s revenue and expenses that remains fixed throughout a period. Despite any decreases or increases in sales, finance departments often use a static budget to benchmark goals they can accomplish separately. It’s common to see this kind of budget for nonprofit organizations, educational institutions or government bodies that receive a fixed amount of equity to use for their continued operation and growth.
A cash budget comprises the estimated money that comes in and goes out of a company during a period. You can create cash flows for a company by using predictive inferences and sales forecasts for production and by reviewing its estimated payables and receivables. Cash flow budgets can give companies a clear understanding of whether their use of money is productive, whether they have enough available cash for operations and whether they’re earning a profit.
Financial budgets give companies insight into how much capital they need and when they may need it to fulfill long- and short-term goals. A financial budget can include things like business liabilities, assets or shareholder equity. Determining a company’s financial budget accurately can help you determine a company’s overall financial health and help you meet targets correctly.
Labor budgets can help businesses that plan to hire new staff members to meet their goals. A labor budget can help showcase the physical workforce the company needs for its goals, which can help it better plan the payroll and other expenditures necessary for the new staff. It also can help companies allocate expenses for seasonal and contract work.
Managers often use a production budget to estimate the number of units a company produces in future periods based on the estimated sales numbers. They also use this report as a planning tool for future production processes, machine times and scheduling. With a production budget, production managers can estimate future demands and plan the workflow to ensure the company produces everything efficiently.