Creating a budget is essential for any business, but it can be difficult to know where to start. There are five main types of budgeting processes that business leaders can use to ensure their company is successful and profitable. Understanding the different types of budgets and their classifications is key to making sure your business is running smoothly. The first type of budgeting is the master budget.
This is an aggregation of lower-level budgets created by the different functional areas of an organization. It includes inputs from the financial statements, the cash forecast, and the financial plan. Management teams use master budgets to plan the activities they need to achieve their business goals. In larger organizations, senior management is responsible for creating several iterations of the master budget before it is finalized.
Once it has been reviewed for the last time, funds can be allocated for specific business activities. Smaller companies often use spreadsheets to create their master budgets, but replacing spreadsheets with efficient budgeting software usually reduces errors. The second type of budgeting is an operating budget. This shows a company's projected revenues and the expenses associated with them over a period of time. It's very similar to a profit and loss report and includes fixed cost, variable cost, capital costs, and non-operating expenses.
While this budget is a high-level summary report, each item is backed up with relevant details. This information is useful to check if the company spends according to its plans. The third type of budgeting is a cash flow budget. This gives you an estimate of the money that comes in or out of a company during a specific period of time. Organizations create cash budgets using deductions from sales and production forecasts, and estimating accounts payable and receivable. The fourth type of budgeting is a work budget.
This helps you determine the workforce you'll need to achieve your goals, so you can plan payroll for all those employees. In addition to planning for regular staffing, it also helps you allocate expenses to seasonal workers. The fifth type of budgeting is a static budget. As the name suggests, this budget is an estimate of income and expenses that will remain fixed throughout the year. The items in this budget can be used as objectives to be met regardless of any increase or decrease in sales.
Static budgets are usually prepared by non-profit organizations, educational institutions or government agencies that are allocated a fixed amount to be used in their activities in each area. Creating a budget can be difficult but it's essential for any business that wants to succeed. Understanding the different types of budgets and their classifications will help you make sure your company is running smoothly and efficiently.
