What Types of Budgets Do Businesses Use?

Introduction

Businesses use budgets to plan for future activities and to set various goals and objectives within the company. They help the organization set specific expectations which aid in evaluating performance throughout the company. Budgeting helps organizations implement specific strategies to meet goals and objectives. It is important to note that a budget is an estimate and will often need to be adjusted over time.

In order to properly plan and set goals, several different budgets must be created. This article discusses some of the more common budgets used by businesses.

Sales Budget - The sales budget is an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.

Production Budget - Product oriented companies create a production budget. It is an estimate of the number of units that must be manufactured in order to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, such as labor, material, and other expenses.

Cash Flow Budget - The cash flow budget is a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.

Marketing Budget - The marketing budget is an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.

Project Budget - The project budget is a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.

Capital Budget - The capital budget is a prediction of company needs in regard to fixed assets, such as buildings, vehicles, machinery, and other equipment. It includes the cost of upgrading present assets, the cost of acquiring new assets, costs associated with maintenance of the assets, and fees associated with the assets. The capital budget helps the company plan for the acquisition and upkeep of these assets, which may include use of available cash or outside financing.

Master Budget - The master budget is a summary of the plans created for the subunits of the company. It is used to create projected financial statements. The master budget results in the creation of a pro forma income statement and a pro forma balance sheet. These are also referred to as a budgeted income statement and a budgeted balance sheet. Potential investors and lenders want to see the projected financial statements in order to make decisions that will ultimately affect the company.

Melissa Bushman has published additional articles at Associated Content. Please click her name at the top of this page to view her other work.