The different types of budgets in companies are 1. Static budgets are fixed or unchanged budgets. This budget details the revenues and expenses that will remain fixed throughout the year, regardless of whether the company is generating revenue. Companies generally don't adopt static budgets due to their rigid nature. Educational institutions, government agencies and NGOs must use this budget for some of their activities. Step 2 — Gather financial information Step 3 — Identify the various sources of revenue Step 6 — Create a budget structure Step 7 — Determine the budget period Step 8 — Establish budget guidelines Step 10 — Communicate the plan.
However, before you start with the master budget, you must first work in retrospect and create the individual budgets that apply to your company. Most companies should familiarize themselves with operating, financial, cash, labor, and static budgets. An operating budget is an essential aspect of any master budgeting plan, as it provides a detailed view of a company's expected revenues over the next few months to a year. Operating budgets focus on expenses, the cost of goods sold (COGS), revenues, overheads, and administrative costs within a company.
Companies of any size can use an operating budget, but it's typically reserved for sales and manufacturing departments. This is because the focus is on setting financial goals and then analyzing the results to see if those goals were achieved. If the objectives are not met, companies can still better understand what needs to be changed in the operating budget for the next period. Operating budgets predict the company's revenues for the next few months to a year, so they can be created monthly or quarterly. Fortunately, creating one is relatively simple and requires only your monthly sales, operating expenses, and labor costs.
Along with the operating budget, financial budgets are the other essential aspect of your master budget. The purpose of your financial budget is to present the company's strategy for managing assets, cash flow, revenues, and expenses, so that business and financial leaders can see precisely where, why and how the company spends and makes money. While any company can use financial budgets, larger companies focus more on them for decision-making and planning. This is because small organizations usually plan one or two years in advance, while business organizations can plan a decade in advance. However, creating a financial budget is beneficial for small and medium-sized businesses, as it is necessary to obtain valuable information about their expenses in relation to revenues from core operations.
The financial budget allows you to have a clear view of the financial resources you have and where your money is going, since it includes the budgeted balance sheet and cash flows. When creating the financial budget, you'll analyze your plans for managing your assets, cash flow, income, and expenses. This essential type of budget requires including real and forecasted numbers, which are used throughout the accounting period to ensure that everything is on track. A cash budget is an estimate of a company's cash flow over a specific period.
This type of budget is intended to help a company manage and measure its revenues (cash inflow) compared to Anyone can use a cash budget because it helps business leaders regulate their expenses and estimate if they have enough cash to pay for their regular operations. Business leaders and managers use cash budgets to ensure that there is enough money for all of their expenses each month, quarter, or year. For example, let's say your employees are paid every two weeks. Your cash budget allows you to see if you have enough cash balance between payroll expenses that occur twice a month. A direct labor budget calculates the number of actual working hours needed to produce units.
It helps you measure what it will cost to meet a production or service objective so you can accurately balance working hours and payroll expenses without going over budget. For example, a bakery will need to use a direct labor budget to ensure that it has enough money to pay employees to bake bread on a given day. A static budget is one of the simplest and most used budgeting formats because it is used as a basis for comparing with actual results. A static budget doesn't change no matter what the company's activity levels are. Usually, a static budget is used to keep track of ordinary expenses, such as rent, insurance, payroll, and utility costs, which are essential for keeping track of fixed expenses.
However, static budgets are also ideal for companies with very predictable sales and expenses, such as utility companies. Basically, a static budget predicts a company's variable and fixed costs, meaning that you'll keep track of actual production, volume, and revenues throughout the accounting period. Unlike a static budget, a flexible budget adjusts based on changes in revenues, expenses, and other business-related activities. Ultimately, it helps managers evaluate real changes and costs in real time, while static budgets remain unchanged. Take a look at the example of static budgets. With a flexible budget, business leaders will adjust sales commissions based on lower revenues by a fixed percentage.
Finalize the time frame of the budget plan taking into account the type of industry, the financial cycle, and other factors. While levels of complexity vary depending on the type and size of the company, budgeting activities are essential for making financial and business decisions based on data. Regardless of the types of budgets you decide to work with, the easiest way to manage them is to compile them into a master budget sheet. Organizations use different budgets to manage their finances based on their size, type of industry, and financial needs.
