There is no single budget that can cover all operations of a business. Because of this, businesses use a variety of different budgets for a variety of different reasons.
A business’ ultimate budgeting goal is to match its future performance to an ideal scenario. Accomplishing these financial goals usually requires a a few different types of budgets. Here are some of the most common budget’s used within a company.
Master Budget
The master budget, also referred to as the overall budget, is an aggregate of all the individual budgets within a company. The purpose of a master budget is to present a complete picture of a company’s financial activity. The master budget is generally used within large companies to keep the smaller budgets aligned.
Operational Budget
An operational budget covers revenues and expenses from day to day activity. This budget typically accounts for labor, materials, overhead, manufacturing, and administrative costs. An example of an operational budget might be done to compare month to month operations to see if a company is overspending. the operational budget can be broken down into 3 more precise budgets:
- Expense budget: Documents expected expenses during period
- Revenue budget: Projects future sales
- Profit budget: Combination of the two to show gross and new profits
Cash-Flow Budget
A cash-flow budget projects when and how cash comes in and out of the business. It considers accounts payable and accounts receivable to assess if a company has enough cash to continue operating the way it is. An example of a time you would use a cash-flow budget is if your company is trying to determine if they can start a new project before getting paid for the work it has in progress.
Financial Budget
A financial budget establishes what the company’s financial health is, and presents a comprehensive overview of its financials. The company’s overview includes things like managing assets, cash flow, income, and expenses. A company might use this budget to determine its value during an IPO or merger.
Static Budget
A static budget is a fixed budget that remains the same no matter what factors change, such as sales or revenue. These types of condions are routine in public and nonprofit sectors that are funded by grants. An example of a time to use a static budget is for warehousing and storage. No matter how much inventory moves in and out, the price stays fixed.
Everyone can agree the most difficult parts about creating a budget is getting started. And with this many budgets to create it might seem a little overwhelming. You can learn how to solve all these problems, and more in our FREE Guide to Better Budgeting eBook. Simply click the link below to learn how you can create the best budget(s) for your business.
