What is a budget? (definition, types and examples)

budget is a document where forecasts or forecasts for a given period of time are quantified.

In the case of a company’s budget, this quantifies forecasts or forecasts of different elements of it, such as sales, purchases, production, administrative expenses, and sales expenses.

Budgets are a fundamental management tool for any company since they allow planning, coordinating, controlling and evaluating the different operations, resources and activities of this company.

A company budget is a document that shows the forecast of different elements of it in monetary terms.

In this article you will find:

  • What is a budget?
  • What is the use of a budget?
  • Types of budgets in a company
  • What is the master budget?
  • Summary

What is a budget?

A budget is a document where forecasts or forecasts for a given period of time are quantified.

In the case of a company’s budget , this quantifies forecasts or forecasts of different elements of it, such as sales, purchases, production, administrative expenses, and sales expenses.

It is often thought that the budgets of a company only quantify forecasts or forecasts of the elements related to its income and expenses, but the truth is that they quantify forecasts or forecasts of any element that can be quantified.

For example, in addition to the sales and purchase budgets, in a company we can also find budgets for the products that are going to be manufactured, and the materials that are going to be required to manufacture these.

The budgets of a company are usually prepared by the managers of the different areas or departments of the company in coordination with the other areas or departments, and taking into account the objectives, strategies and values ​​of the company, and the guidelines of senior management in in case there were.

Also, the budgets of a company are usually drawn up at the end of the year for a period of one year (for the coming year), and are flexible documents that are reviewed (and corrected if necessary) monthly or quarterly.

What is the use of a budget?

Budgets are a fundamental management tool for any company since they allow planning, coordinating, controlling and evaluating the different operations, resources and activities of this company.

Planning

Budgets allow you to plan operations, resources, and activities, and therefore help us anticipate events, reduce uncertainty, and minimize risk.

For example, making a budget with the sales that we are going to have (sales budget), allows us to plan the purchase or manufacture of the products that we are going to sell, and the money that we are going to need to buy or manufacture these.

Coordination

Budgets also serve as a guide to coordinate operations, resources and activities and, therefore, help us to harmonize and integrate all areas or departments of the company.

For example, when making the production budget, the production area must coordinate with the finance area the availability of money that allows it to meet its objectives.

Control and evaluation

Finally, budgets serve as an instrument of control and evaluation since they allow comparing the results obtained with those budgeted.

For example, they allow us to know in which areas there have been deviations or variations (differences between the results obtained and those budgeted for) and, therefore, in which areas we must take corrective measures.

Types of budgets in a company

The budgets of a company can be classified according to various criteria, such as its flexibility or the period of time they cover; however, they are mainly classified according to their field of application:

Here are the main types of budgets that exist in a company according to their field of application:

Sales budget

The sales budget shows the sales forecast of a company in monetary terms for a certain period of time.

The sales budget is the main budget of a company since it is from this that all other budgets are made.

To make the sales budget we need the sales forecast (the sales expected to have for a certain period of time), and the sale price of the product or products.

For example, if a company has predicted that sales for January will be 100 units and then increase by 10% each month until April, and the sale price of each product is US $ 20, its sales budget will be the next:

  January February March April
Units 100 110 121 133
Sale price twenty twenty twenty twenty
TOTAL 2000 2200 2420 2662

Note: Sales start at 100 units in January and then increase by 10% each month .

Collections budget

The collection budget (or accounts receivable budget) shows the amount of collections (product of sales) to be made for a certain period of time.

In a small business, collections are usually made at the time of the sale of the product or the provision of the service; but in medium or large companies, collections are not always made at the time of sale, but are also made, for example, 30 or 60 days.

To make the collection budget we need the sales budget and the collection policy of the company.

For example, if in a company whose collection policy is to collect 60% of cash sales and the balance of 30-day credit, it has been forecast that sales for the first four months of the year will be US $ 2,000, US $ 2,200, US $ 2,420 and US $ 2,662, your collection budget will be as follows:

  January February March April
Cash (60%) 1200 1320 1452 1597.20
Credit (40%)   800 880 968
TOTAL 1200 2120 2332 2565.20

Note: for sales of US $ 2,000 in January, US $ 1,200 (60%) is charged in cash, and US $ 800 (40%) the following month (30-day credit) .

Shopping budget

The purchase budget shows the amount of purchases of products or merchandise that will be made for a certain period of time.

To make the purchase budget we need the planning of the company’s purchases, and the purchase price of the products or merchandise.

For example, if a company has planned that purchases for the first four months of the year will be 100, 110, 121 and 133 units, and the purchase price of the product is US $ 14, its purchasing budget will be as follows :

  January February March April
Units 100 110 121 133
Purchase price 14 14 14 14
TOTAL 1400 1540 1694 1863.40

Payment budget

As in the case of the collection budget, in a company payments for purchases made are not always made in cash, but are also made, for example, in 30 or 60 days.

The payment budget (or accounts payable budget) shows the amount of payments (product of purchases) to be made for a certain period of time.

To make the payment budget we need the purchase budget and the collection policy of the supplier or suppliers of the company.

For example, if a company has forecast that purchases for the first four months of the year will be US $ 1,400, US $ 1,540, US $ 1,694 and US $ 1,863.40, and the supplier’s collection policy is 50% in cash and the remaining 50% of the 30-day credit, your payment budget will be as follows:

  January February March April
Cash (50%) 700 770 847 931.70
Credit (50%)   700 770 847
TOTAL 700 1470 1617 1778.70

Note: for purchases of US $ 1,400 in January, US $ 700 (50%) is paid in cash, and US $ 700 (50%) the following month (30-day credit) .

Administrative expenses budget

Administrative expenses are the expenses of the company related to management activities, such as the labor expenses of managers and administrators, rents, office supplies and materials, insurance, basic services, etc.

The administrative expenses budget shows the amount of administrative expenses that the company expects to have for a certain period of time.

To make the budget of administrative expenses we need the forecast of the administrative expenses of the company.

An example of an administrative expense budget is as follows:

  January February March April
Remunerations fifty fifty fifty fifty
Local rental twenty twenty twenty twenty
Insurance 5 5 5 5
Cleaning and maintenance 10 10 10 10
Basic services 10 10 10 10
Office supplies 5 5 5 5
TOTAL 100 100 100 100

Sales Expense Budget

Selling expenses are the expenses of the company related to the marketing activities of the products, such as the labor expenses of the sellers, promotion and advertising, packaging, transportation, storage, etc.

The sales expense budget shows the amount of sales expenses that the company expects to have for a certain period of time.

To make the budget of sales expenses we need the forecast of the sales expenses of the company.

An example of a sales expense budget is as follows:

  January February March April
Remunerations 40 40 40 40
commissions 5 5 5 5
Freight 5 5 5 5
Promotion and publicity twenty twenty twenty twenty
TOTAL 70 70 70 70

Cash budget

The cash budget (also known as projected cash flow ) shows the cash income and expenses that the company expects to have for a given period of time.

Unlike the operating budget (which we will see below), the cash budget shows the money that will actually go in or out of the company, regardless of when sales or purchases will be made.

To make the cash budget we need all the other company budgets that show cash income or expenses.

An example of a cash budget is as follows:

  January February March April
INCOME        
Accounts receivable 1200 2120 2332 2565.20
TOTAL INCOME 1200 2120 2332 2565.20
         
EXPENSES        
Debts to pay 700 1470 1617 1778.70
Administrative expenses 100 100 100 100
Selling expenses 70 70 70 70
Tax payment 8.30 9.50 10.82 12.27
TOTAL EXPENSES 878.30 1649.50 1797.82 1960.97
         
CASH FLOW 321.70 470.50 534.18 604.23

Operating budget

The operating budget (also known as the projected income statement) shows the income and expenses that the company expects to have for a certain period of time.

Unlike the cash budget, the operating budget shows the company’s income and expenses at the time they will occur, regardless of when the collections or payments will take effect.

To prepare the operating budget we need the sales budget and all other company budgets that show income or expenses.

An example of an operating budget is as follows:

  January February March April
Sales 2000 2200 2420 2662
Sales cost 1400 1540 1694 1863.40
GROSS PROFIT 600 660 726 798.60
         
Administrative expenses 100 100 100 100
Selling expenses 70 70 70 70
Depreciation fifteen fifteen fifteen fifteen
PROFIT BEFORE IMP. 415 475 541 613.60
         
Taxes (2%) 8.30 9.50 10.82 12.27
NET PROFIT 406.70 465.50 530.18 601.33

What is the master budget?

For a better use of the budgets of a company and to better appreciate the relationship they have with each other, these are usually presented together in what is known as the master budget or budget system.

The master budget always starts with the sales budget, which is the base budget from which all other budgets are made.

Then it usually continues with the collection budget, the production budget (in the case of a producing company) or the purchasing budget (in the case of a marketing or service company), the requirement of raw material (in the case of a producing company), payment, expenses, and debt payment.

And then it usually ends with the cash budget (projected cash flow), the operating budget (projected income statement), and the balance sheet budget (projected balance).

Let’s see below an example of how to make a master budget:

Suppose we want to budget the operations of a marketing company (company dedicated to the purchase and sale of products) for the period of the first four months of the year, for which we take into account the data from last year and the following data or expected objectives :

  • 100 units are projected to be sold monthly, which will increase by 10% each month.
  • the sale price of each product is US $ 20.
  • 60% of sales are cash and the balance on credit is 30 days.
  • purchases are equivalent to sales.
  • 50% of purchases are cash and 50% to 30-day credit.
  • The purchase price of the product is US $ 14.
  • The following monthly administrative expenses are estimated:
    • administrative area staff remuneration: US $ 50
    • local rent: US $ 20
    • insurance: US $ 5
    • cleaning and maintenance: US $ 10
    • basic services: US $ 10
    • office supplies: US $ 5
  • The following monthly sales expenses are estimated:
    • Sales area staff compensation: US $ 40
    • commissions: US $ 5
    • Freight: US $ 5
    • promotion and advertising: US $ 20
  • it has furniture and computer equipment, which have a monthly depreciation of US $ 10 and US $ 5 respectively.
  • the payment of taxes corresponds to 2% of the available profit.

First of all we prepare the sales budget:

1. Sales budget

  January February March April
Units 100 110 121 133
Sale price twenty twenty twenty twenty
TOTAL 2000 2200 2420 2662

Note: Sales start at 100 units in January and then increase by 10% each month .

2. Collections budget

  January February March April
Cash (60%) 1200 1320 1452 1597.20
Credit (40%)   800 880 968
TOTAL 1200 2120 2332 2565.20

Note: for sales of US $ 2,000 in January, US $ 1,200 (60%) is charged in cash, and US $ 800 (40%) the following month (30-day credit) .

3. Budget for purchases

  January February March April
Units 100 110 121 133
Purchase price 14 14 14 14
TOTAL 1400 1540 1694 1863.40

Note: each month the same quantity is sold (there is no ending inventory) .

4. Budget of payments

  January February March April
Cash (50%) 700 770 847 931.70
Credit (50%)   700 770 847
TOTAL 700 1470 1617 1778.70

Note: for purchases of US $ 1,400 in January, US $ 700 (50%) is paid in cash, and US $ 700 (50%) the following month (30-day credit) .

5. Budgets for administrative expenses

  January February March April
Remunerations fifty fifty fifty fifty
Local rental twenty twenty twenty twenty
Insurance 5 5 5 5
Cleaning and maintenance 10 10 10 10
Basic services 10 10 10 10
Office supplies 5 5 5 5
TOTAL 100 100 100 100

6. Sales Expense Budgets

  January February March April
Remunerations 40 40 40 40
commissions 5 5 5 5
Freight 5 5 5 5
Promotion and publicity twenty twenty twenty twenty
TOTAL 70 70 70 70

7. Depreciation

  January February March April
Furniture 10 10 10 10
Calculation 5 5 5 5
TOTAL fifteen fifteen fifteen fifteen

8. Cash budget (projected cash flow)

  January February March April
INCOME        
Accounts receivable 1200 2120 2332 2565.20
TOTAL INCOME 1200 2120 2332 2565.20
         
EXPENSES        
Debts to pay 700 1470 1617 1778.70
Administrative expenses 100 100 100 100
Selling expenses 70 70 70 70
Tax payment 8.30 9.50 10.82 12.27
TOTAL EXPENSES 878.30 1649.50 1797.82 1960.97
         
CASH FLOW 321.70 470.50 534.18 604.23

9. Operating budget (projected income statement)

  January February March April
Sales 2000 2200 2420 2662
Sales cost 1400 1540 1694 1863.40
GROSS PROFIT 600 660 726 798.60
         
Administrative expenses 100 100 100 100
Selling expenses 70 70 70 70
Depreciation fifteen fifteen fifteen fifteen
PROFIT BEFORE IMP. 415 475 541 613.60
         
Taxes (2%) 8.30 9.50 10.82 12.27
NET PROFIT 406.70 465.50 530.18 601.33

Summary

A budget is a document where forecasts or forecasts for a given period of time are quantified.

A company budget is a budget where forecasts or forecasts of various elements of the company, such as sales, purchases and expenses, are quantified.

The budgets of a company allow planning, coordinating, controlling and evaluating its operations, resources and activities.

Budgets for a company are usually prepared by the corresponding area or department in coordination with the other areas or departments and the company’s senior management, for the coming year.

The main budgets of a company are the sales budget, the collection budget, the purchase budget, the payment budget, the administrative expenses budget, the sales expenses budget, the cash budget and the operating budget.

The master budget or budget system is a budget that shows all the other budgets of a company.

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