Budgeting in Business: Components, 7 Types and Example

Manage Cash Flow

A business relies on accurate budgeting to manage its cash flow more efficiently. The revenue coming in and costs going out are important metrics that can influence the business’s overall financial health. Reviewing and evaluating the budget semi-annually or annually can help organizations better plan for growth and profitability.

Allocate Resources

Because a budget provides a data-based outline of revenues and expenses, a business can better determine where to allocate operational funds and resources. For example, a business might determine through budget analysis that its digital marketing strategies are more effective than its mail marketing tactics to bring in new customers. The business may decide to eliminate its mail campaigns and allocate those resources to its digital marketing strategies to achieve revenue goals.

Measure Performance

Budgets help businesses compare past and present operational processes to analyze performance. For example, a financial analyst can use budgets to compare a company’s revenue from the past year to the present income. This allows them to evaluate strategies and their outcomes for the company, which can help it make better choices for the future.

Meet Objectives

Budgets help businesses compare past and present operational processes to analyze performance. For example, a financial analyst can use budgets to compare a company’s revenue from the past year to the present income. This allows them to evaluate strategies and their outcomes for the company, which can help it make better choices for the future.

Improve Decisions

Accurate budgeting can help executives make strong decisions that benefit the operation and financial health of their companies. With these financial comparisons, executives can make more informed financial decisions. For example, a business might analyze its budget to ensure investment decisions provide a return and how to allocate funding and resources in the future.

Identity and Mitigate Risk

With a comparison of previous spending and current expense allocations, businesses can identify potential problems. Identifying these issues can help management teams create solutions before issues arise to help them overcome the challenges more effectively. In addition, a budget can help keep a company’s staff aligned with the management’s goals.

Create Plans

Companies create strategic plans for future growth and development. They can use the data from budgets to help them implement strategies to meet these goals. With a budget, businesses can create revenue and cost projections to make important financial decisions.

Sales and revenue

An effective budget includes the revenue a company expects to make from the sale of its goods or services. It’s typically the first line in a budget, and it serves as the basis for most calculations in the document. Companies often determine these figures based on the previous year’s actual revenue amounts plus projections for the current year.

Total Cost and Expenses

Budgeting requires estimating the costs of doing business. Business expenses can include a variety of costs related directly to production and operations, along with overhead costs. Expenses generally include:

• Cost of goods sold (COGS): COGS is the total cost of what it takes to make a product. For example, a manufacturing company that produces car parts may include the costs of raw materials, equipment maintenance and specialized personnel to run the machines within its COGS.

• Fixed expenses: Fixed expenses include all the regular and consistent expenses of a business. Fixed expenses remain unchanged during the budgetary period and include costs for things like property mortgage or rent payments, insurance, utility fees, wages and equipment and property leases.

• Variable expenses: Variable expenses typically vary with production or sales volume and include most expenses related to running a business. Variable or operational expenses can include commission and hourly rate wages, administrative costs such as bookkeeping and business transportation.

• One-off expenses: A one-off expense is a one-time fee or payment, like a large supply purchase or the cost to move business locations. Businesses include one-off expenses in their budgets to represent the expenses they have more accurately.

Cost of goods sold (COGS)

COGS is the total cost of what it takes to make a product. For example, a manufacturing company that produces car parts may include the costs of raw materials, equipment maintenance and specialized personnel to run the machines within its COGS.

Fixed Expenses

Fixed expenses include all the regular and consistent expenses of a business. Fixed expenses remain unchanged during the budgetary period and include costs for things like property mortgage or rent payments, insurance, utility fees, wages and equipment and property leases.

Variable Expenses

Variable expenses typically vary with production or sales volume and include most expenses related to running a business. Variable or operational expenses can include commission and hourly rate wages, administrative costs such as bookkeeping and business transportation.

One-off Expenses

A one-off expense is a one-time fee or payment, like a large supply purchase or the cost to move business locations. Businesses include one-off expenses in their budgets to represent the expenses they have more accurately.

Operating Budget

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.

Master Budget

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.

Static Budget

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.

Cash Budget

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 Budget

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 Budget

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.

Production Budget

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.