BUDGETS
No business should commence operation without a budget having been prepared. A budget is the business’s financial plan for the future. It outlines how the business will use its resources to meet its goals. The budget contains projection of incomes and expenses over a set period of time.
The small business owner needs to predict the business’s financial needs at various points in time. Once the owner has determined the goals and objectives, they can then estimate the various costs the business will need to meet and the revenue it will receive. A profit budget will establish the viability of the business by predicting how much profit is likely to be made from expected sales. Although these figures are estimates – they must be realistic.
Regardless of the type of budget being prepared, it is important that the budgeting process remains flexible. Because budgets involve predictions of future events, they are not expected to be perfect.
Budgets are simply a tool for planning future events. As time passes, the budget plan should be reviewed and updated as required. Modifications should be made as more up to date information and figures become available.
Budgets provide information in quantitative terms (that is, as facts and figures) for planning and decision-making and enable constant monitoring of progress in problem areas.
Budgets can be drawn up to show:
- cash required for planned outlays for a particular period
- the cost of capital expenditure and associated expenses against expected revenue
- estimated use and cost of raw materials or inventory
- number and cost of labour hours required for production
They provide financial information for specific goals of a business and are used in strategic, tactical and operational planning.
Budgets enable constant monitoring of objectives and whether they are being achieved. They assist in emphasising the corporate objectives of the business and provide a basis for administrative control, direction of sales efforts, production planning, control of stock, price setting, financial requirements, control of expenses and production cost control.
Budgets are used in both the planning and control of a business. As a control measure, planned performance can be measured against actual performance, enabling the business to take corrective action as needed.
In preparing a budget, various factors need to be considered, for example:
- review of past figures and trends, and estimates gathered from relevant departments in the business
- potential market or market share, and trends and seasonal fluctuations in the market
- proposed expansion or discontinuation of projects
- proposals to alter price or quality of products
- current orders and plant capacity
- considerations from the external environment (for example, financial trends, availability of materials and labour)
Types of Budgets
There are many different types of budgets that can be prepared including:
- capital expenditure budgets – these budgets show the planned expenditure on items such as plant and machinery, and the expected revenue to be generated from them.
- profit and loss budget – this budget provides a summary of all estimated revenues and expenses
- cash budgets – these predict the future cash flows of the business, that is, plans of anticipated receipts and payments and the resulting cash balance.
- Labour budgets – these budgets are used to predict the staff required and the cost of such staff
- Master budget – This budget sets out the overall planning strategy of a business and is made up of figures from most other budgets
- Production and output budgets – estimates the cost of materials, labour and overheads that will be required to generate the amount of production that achieves the business’s objectives.
- Sales budgets – this involves estimating the future sales of the business.
Different forms of budgets will quite often interrelate with one another. Individual budgets are not prepared in isolation. In many cases, an item that appears in one budget, will also affect one or more other budgets.
For example:
Sales Budget affects the Purchases Budget
Purchases Budget affects the Labour Budget
Labour Budget affects the Expense Budget
Expense budget affects the Cash Budget, which affects Budgeted Profit and Loss, which affects Budgeted Balance sheet
Different business will require different budgets. The size and nature of the business under consideration, will dictate what budgets need to be prepared. For example, if a business consists of different departments – departmental budgets can be prepared.
