What is Budget? A budget is a document where forecasts for a given period of time are quantified.

In the case of a company’s budget, forecasts of different elements of the company are quantified, such as sales, purchases, production, administrative expenses, and sales expenses.

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

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

What is Budget?

What is Budget? A budget is a document where forecasts for a given period of time are quantified.

In the case of a company’s budget, forecasts of different elements of the company are quantified, such as sales, purchases, production, administrative expenses, and sales expenses.

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

For example, in addition to the sales and purchasing budgets, in a company, we can also find budgets of 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.

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

What is the Usefulness of a Budget?

Budget is a fundamental management tool for every company since they allow planning, coordinating, controlling and evaluating the different operations, resources and activities of the company.

Planning

Budgets allow you to plan operations, resources, and activities and, therefore, help us to anticipate the facts, 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

The 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) 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 given period of time.

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

To make the sales budget, we need the sales forecast (the sales expected 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 sales price of each product is US $ 20, its sales budget will be the next:

JanuaryFebruaryMarchApril
Units100110121133
Sale price20202020
TOTAL2000220024202662

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

Collection Budget

The collection budget (or accounts receivable budget) shows the number of collections (product of sales) that will be made for a given period of time.

In a small business, collections are usually made at the time of product sale or service provision; but in medium or large companies, collections are not always made at the time of sale, but are also made, for example, within 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 that has a collection policy to charge 60% of cash sales and credit balance at 30 days, it has been predicted 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, its collection budget will be as follows:

January FebruaryMarchApril
Counted (60%)1200132014521597.20
Credit (40%)800880968
TOTAL1200212023322565.20

Note: from the 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 number 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 :

JanuaryFebruaryMarchApril
Units100110121133
Sale price14141414
TOTAL1400154016941863.40

Payment Budget

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

The payment budget (or accounts payable budget) shows the number 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 of the company’s suppliers.

For example, if a company has predicted 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 its supplier’s collection policy is 50% cash and the remaining 50% on the 30-day loan, the payment budget will be as follows:

January FebruaryMarchApril
Counted (50%)700770847931.70
Credit (50%)700770847
TOTAL700147016171778.70

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).

The budget for administrative expenses

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

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

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

An example of an administrative expense budget is as follows:

JanuaryFebruaryMarchApril
Compensation50505050
Rental of the premises20202020
Insurance5555
Cleaning and maintenance10101010
Basic services10101010
Office supplies 5555
TOTAL100100100100

Sales Expense Budget5

Sales expenses are the expenses of the company related to the marketi5ng activities of the products, such as the labor costs of the sellers, promotion, and advertising, packaging, transport, storage, etc.

The sales expense budget shows the amount of sales expenses that the company 100expects to have for a given period of time.

To make the budget for sales expenses, we need a forecast of the sales expenses of the company.100

An example of a sales expense budget is as follows:

JanuaryFebruaryMarch April
Compensation40404040
commissions5555
Freight5555
Promotion and publicity20202020
TOTAL70707070

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, the cash budget shows the money that will actually enter or leave the company, regardless of when sales or purchases will be made.

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

An example of a cash budget is as follows:

JanuaryFebruaryMarchApril
INCOME
Accounts Receivable1200212023322565.20
TOTAL INCOME1200212023322565.20
EXPENSES
Debts to pay700147016171778.70
Administrative expenses100100100100
Selling expenses70707070
Tax payment 8.309.5010.8212.27
TOTAL EXPENSES878.301649.501797.821960.97
CASH FLOW321.70470.50534.18604.23

Operating Budget

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

Unlike the cash budget, the operating budget shows the income and expenses of the company at the time they will occur, regardless of when the payments will be effective.

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

An example of an operating budget is as follows:

JanuaryFebruaryMarchApril
Sales2000220024202662
Sales cost1400154016941863.40
GROSS PROFIT600660726798.60
Administrative expenses100100100100
Selling expenses70707070
Depreciation50505050
UTILITY BEFORE IMP.415475541613.60
Taxes (2%)8.309.5010.8212.27
NET PROFIT406.70465.50530.18601.33

What is the Master Budget?

For better use of the budgets of a company and to be able 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 prepared.

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

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

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

Assume that we want to budget the operations of a marketing company (a 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 objectives planned:

  • 100 units are planned 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 credit balance at 30 days.
  • Purchases are equivalent to sales.
  • 50% of purchases are cash and 50% on 30-day credit.
  • The purchase price of the product is US $ 14.
  • The following monthly administrative expenses are estimated:
    • Remuneration of personnel in the administrative area: US $ 50
    • Local rental: 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:
    • Remuneration of sales area staff: US $ 40
    • Commissions: US $ 5
    • Freight: US $ 5
    • Promotion and advertising: US $ 20
  • There is 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, we prepare the sales budget:

1# Sales budget

JanuaryFebruaryMarchApril
Units100110121133
Sale price20202020
TOTAL2000220024202662

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

2# Collection budget

January FebruaryMarchApril
Counted (60%)1200132014521597.20
Credit (40%)800880968
TOTAL1200212023322565.20

Note: from the 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# Purchase budget

JanuaryFebruaryMarchApril
Units100110121133
Sale price14141414
TOTAL1400154016941863.40

Note: the same amount sold is purchased every month (there is no final inventory).

4# Payment budget

January FebruaryMarchApril
Counted (50%)700770847931.70
Credit (50%)700770847
TOTAL700147016171778.70

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 of administrative expenses

JanuaryFebruaryMarchApril
Compensation50505050
Rental of the premises20202020
Insurance5555
Cleaning and maintenance10101010
Basic services10101010
Office supplies 5555
TOTAL100100100100

6# Sales expense budgets

JanuaryFebruaryMarch April
Compensation40404040
commissions5555
Freight5555
Promotion and publicity20202020
TOTAL70707070

7# Depreciation

JanuaryFebruaryMarch April
Compensation40404040
commissions5555
Freight5555
Promotion and publicity20202020
TOTAL70707070

8# Cash budget (projected cash flow)

JanuaryFebruaryMarchApril
INCOME
Accounts Receivable1200212023322565.20
TOTAL INCOME1200212023322565.20
EXPENSES
Debts to pay700147016171778.70
Administrative expenses100100100100
Selling expenses70707070
Tax payment 8.309.5010.8212.27
TOTAL EXPENSES878.301649.501797.821960.97
CASH FLOW321.70470.50534.18604.23

9# Operating budget (projected income statement)

JanuaryFebruaryMarchApril
Sales2000220024202662
Sales cost1400154016941863.40
GROSS PROFIT600660726798.60
Administrative expenses100100100100
Selling expenses70707070
Depreciation50505050
UTILITY BEFORE IMP.415475541613.60
Taxes (2%)8.309.5010.8212.27
NET PROFIT406.70465.50530.18601.33

Summary

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

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

The budgets of a company allow you to plan, coordinate, control and evaluate its operations, resources and activities.

The budgets of a company are usually prepared by the corresponding area or department in coordination with the other areas or departments and senior management of the company, 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 budget, the sales expense, the cash budget, and the operating budget.

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

Finally, in addition to the budgets, there are other financial management tools that are usually used in a company, such as cost accounting, and the breakeven point.

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