Budget is defined as a plan, financial in nature, for a predefined period usually for a period of one year. For example, a sum of money allocated for a period of one year. It is an integral part of almost everything be it government, organizations, small businesses, or even a household.
The budget makes its presence everywhere and ensures proper adherence to it since the crossing of the budget is not a good sign but the underutilizing budget is the aim. Overspending of the budget shows a lack of planning and managing costs and income. An ideal budget should cover all the expenses and leave a little surplus for additional and unforeseen expenses.
Following are 10 different types of Budget. These are commonly used in almost every organization but various businesses may require different budgets depending on their nature of the business and their specific requirements.
Here are the 10 Types of Budgets that Businesses can use
1) Cash flow budget
Predicting when and how the cash will flow in or out of the business is called a cash flow budget. The cash flow budget is usually specified for a specific time, for example, a year. Cash flow budget is useful for the organization to manage its cash and it also considers factors such as accounts receivable accounts payable to determine whether a company has sufficient cash flow in hands for continuing its operations.
Cash flow is also important in determining major investment decisions of the company. A Pharmaceutical company, for example, may use its cash flow budget to predict whether it can start investing in a new product or not. Many organizations invest the additional cash flow generated after taking care of all expenses into social and charitable work which falls under corporate social responsibility.
2) Operating Budget
A forecast of projected income and expenses along with its analysis over the course of a specific period of time is called the operating budget. Operating budget must include factors such as production, labour cost, etc. to provide a clear picture for the company.
The specific time period for operating budget is weekly, monthly, quarterly, half yearly or yearly depending on the convenience of the organization. A regular month on month or quarter on quarter analysis of these reports helps in the determination of overspending of budgets.
3) Financial budget
The company strategy for managing it assets income and expenses and other financial aspects are present in the financial budget. The financial budget helps to paint the overall picture of the financial health of the company and an overview of it spending in accordance with its revenues from core operations.
A financial budget is a very strong determinant of stability of the company and a positive financial budget means good business and healthy organization why the negative financial budget indicates probable issues.
4) Sales Budget
This type of budget gives some expected sales revenue and expenses and selling for the organization for a specific period of time. It is the backbone of the organization or it is also known as the nerve centre since it is the initiation on which are deposits are also based. Sales forecasting plays a very important role and determination of sales budget is both should be proper for further things to fall in place.
Forecasting of sales can be done either in quantity or value depending on the organization. In case of heavy equipment’s, it can be mentioned in quantity wise in case of FMCG products business value may be mentioned. Proper forecasting is essential for sales budget since a forecast misses the sales budget might go of which would mean that the operations and availability of materials would be affected.
5) Production budget
Sales budget forms the basis for the preparation of the production budget. Stock levels are also taken into consideration along with the manufacturing program of the organization. The production budget is very useful in determining the cost of production which in turn will decide the price of the product. Every organization has a different type of production budget.
Usually, the budget is divided into production per article per month and the likely demand generated from the market. If the Sales and demand go higher or lower it would be the responsibility of the organization to adjust their production budgets accordingly.
6) Overheads Budget
Overheads Budget is the type of Budget which involves all the costs and expenses needed for a specified period of time of production. This includes but is not limited to indirect labor, direct and indirect factory expenses, and other related expenses.
A collection of all the overheads of the factory, admin, distribution etc. is included under Overheads Budget. Usually, the budget is prepared department wise for efficient control over the costs. The manufacturing expenses are further divided into Fixed, semi-variable and variable costs.
7) Personnel Budget
Personnel Budget is one of the crucial types of the budget which covers the manpower budget for the specific period. Labor hours, workers grade, costs etc. Since it takes care of all the personnel, and efficient working of an organization depends on the payment of the employees, this is one of the important types of budget.
8) Marketing Budget
The budget allocated to the Marketing department is known as the Marketing Budget. This type of Budget takes care of all the marketing and promotional activities of the company for the customers. The ultimate aim of marketing is to assist the sales team to generate more business.
The marketing budget for the year decides the number of activities to be done in one financial year. The activities involve a combination of events, promotions, and advertising in order to promote the product to the customer.
9) Static Budget
Static Budget is similar to Fixed costs. These are the expenses which are static and remain unchanged over a long period of time and it could be plumbing supply costs, warehouse cost, factory maintenance etc. It is not influenced by the sales volume or any other changes in the organization.
10) Master Budget
A combination of all the individual budgets of the company, which gives a complete picture of the overall financial picture of the organization is called as Master Budget. All the departmental budgets like Sales, Marketing, Overheads etc budgets are combined to prepare Master Budget. Establishing relation in all the departments is essential and master budget takes care of that. The larger the organization, the useful is master budget since gives one view over all the departments.
The above were all the different types of Budget that exists and the use of these budgets may vary from business to business.