FINANCIAL BUDGET: CHARACTERISTICS, WHAT IT IS FOR, TYPES - DUDAS - 2025

The financial budget is the prediction of the income and expenses of the business in the short and long term. Correct cash flow projections will help the business achieve its goals in the right way.

The preparation of this budget includes a detailed budget of the balance sheet, the budget of the cash flow, the sources of income and expenses of the business, etc.

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The evaluation of income and expenses is carried out on a monthly, quarterly, semi-annual or annual basis, depending on what is most suitable for the organization.

Financial budgeting is a very powerful tool for achieving long-term business goals. It keeps the shareholders and other members of the organization informed about the operation of the company.

In general, this budget is planned for one year. Businesses can forecast budgets for the future if they seek to acquire bank loans or some other type of financing. However, for practical reasons, financial budgets can only be reasonably accurate for one year.

Strategic plan

The financial budget is part of the master budget of a company. The master budget is part of the company's strategic business plan for the future.

Financial budgets reflect the objectives of the company that are linked to the strategic plan of the company. They also reflect the company's business plan, particularly its business action plan.

The company's strategic plan projects its actions for the next five years. The financial budget is generally not planned for that period of time.

characteristics

A financial budget includes information about how a business will acquire cash in the future and how it will spend it in the same period of time.

One of the sections of a financial budget is the cash budget, which describes future cash expenses and allocates incoming cash to cover it.

A capital expenditure budget is another section of a financial budget, which deals with major future expenses, such as the new building to expand.

You will see many financial budgets that only budget for the income statement. Although the interest expenses come from the financial budget, the budget is not only made for the income statement.

The balance sheet is also budgeted. By budgeting for both, you can see the cash flow needs for the entire operation.

If a budget is made only for the income statement, capital expenditures that may need to be made, such as the purchase of a new plant and / or equipment, will not be taken into account.

When you buy new assets, you also have to budget for the debt service of those assets.

Similarities and differences with the operating budget

Both operating budgets and financial budgets depend on the same expectations when it comes to revenue.

In each case, past performance and market trends are used to determine future sales, investment income, and income from the sale of assets, according to a budgeted plan.

However, organizational budgets balance that income with future expenses, whereas a financial budget looks for ways to spend some or all of the income.

A financial budget also includes a balance sheet, which records the assets and liabilities of the organization at any given time, regardless of its projected income or expenses.

What is the financial budget for?

A budget helps an organization allocate its resources to different departments and activities, to effectively manage the company's cash flows. There are many types of budget, one of them being the financial budget.

This budget gives the company better control and an efficient planning mechanism to manage the inflows and outflows of money.

Provide a plan to move the business forward. It addresses not only the financial aspects of the business, but also controls operational efficiency.

With the financial budget, the organization is well prepared to cover short-term and long-term expenses. A good budget helps to achieve the goals and objectives of the company in the shortest possible time.

Purpose

It can drive business growth, help analyze performance to make necessary changes based on actual versus budget comparison, helping staff understand their financial results and plan for improvements. The financial budget is used to:

- Ensure that you are planning for financial growth.

- Make business decisions, such as hiring new staff, buying assets or equipment.

- Integrate the cash flow to see if expenses can be covered and new projects financed.

- Monitor the performance of the work team and motivate them to achieve the objectives.

- Check cash flow before it becomes a problem.

- Evaluate the seasonal peaks and valleys in order to plan them.

The financial budget helps the business plan and control its cash inflows and outflows and its overall financial position.

It also helps the company work towards long-term goals. they are useful for financial investors, who need to measure the health of the business and understand its financial position relative to competitors.

Types

Cash budget

Businesses may show profitability, but fail due to poor timing of their cash flows.

Very small businesses are generally required to pay their suppliers in cash, but they sell to their customers on credit. As a result, they often run into a cash flow problem.

Developing a cash budget is the best way to keep track of cash flows and know that you can stay on track.

The cash budget reports on the inflows and outflows of money from the business. The company's cash flow keeps changing continually, and therefore the cash budget should change as well.

It should be taken into account that the budget is not a static process, but a dynamic process. When information about the company's financial processes changes, it must be immediately reflected in the cash budget.

Budgeted Balance Sheet

The budgeted balance is made up of many other budgets. The main component of this budget includes the production budget and its associated budgets.

Capital expenditure budget

Business owners have to decide, from time to time, whether to replace plant and machinery, or to buy new plant and equipment to grow. These are known as capital expenditures.

Buying fixed assets requires special consideration because they are large purchases, cost a lot of money, and last several years. Issues such as the time value of money and depreciation should be taken into account when considering whether to buy fixed assets.

The capital expenditure budget refers to the expenses related to the plant and machinery, or any fixed assets of the business.

When preparing the capital expenditure budget, factors such as depreciation, the cost of the plant, the useful life of the machinery, etc. are taken into account.

How is it done?

A financial budget works as a roadmap to increase profits. In its simplest form, it projects future sales, costs, profits, and cash flow.

To prepare a financial budget it is important to first prepare the operating budget. The operating budget describes the income-generating activities of the company.

It is with the help of the operating budget that the organization can predict sales and production expenses. For example, the sales budget and the production budget must be known before the financial budget can be prepared.

Therefore, the financial budget is prepared only after knowing the different financing activities in the operating budget. The financial budget plan is made up of the following steps:

- Calculate the expected cash inflow.

- Calculate the expected cash outflow.

- Establish the objectives.

- Divide the expenses within the different categories.

- Keep track of the components in the budget.

- Set up the ledger.

These points give an idea on how to establish the financial budget plan. Organizations can consider different factors when preparing the budget. However, the above points will be part of any budget plan.

Fundamentals

The basics of a financial budget are pretty simple. Projected revenue, expenses (fixed, variable, and one-time costs), and profits are included.

If you have operated in previous years, the actual closing data from the financial statements is a good place to start your budget for the current year.

If it is a new business, the projections for the first year will have to be made with the best estimates. Whether the business is new or existing, projections must be realistic.

These projections will be compared to actual income, expenses and earnings. If the projections appear to be totally out of line with actual income and expenses, then the financial performance of the business is not up to par, or the financial budget projections were unrealistic.

Examples of financial budgets

The basic elements that should be included in any financial budget are the following:

- Income (this could be broken down into sales income, business income, product income).

- Cost of Merchandise Sold: Note that gross profit is calculated by subtracting the cost of merchandise sold from revenue.

- Operating expenses, such as:

- Rental.

- Sales and Marketing.

- General and administrative.

- Transportation.

- Taxes and licenses.

Note that operating profit is calculated by subtracting operating expenses from gross profit.

If you have operations from previous years, you must obtain the data of the real performance of the last year to adjust it to the growth that is planned, and thus be able to convert it into the budget for the current year.

Below is a sample of a fairly simple financial budget, made for Company ABC:

References

1. Efinance Management (2018). Financial Budget. Taken from: efinancemanagement.com.
2. The Balance Small Business (2018). Example of a Financial Budget for a Small Business. Taken from: thebalancesmb.com.
3. Dennis Hartman (2017). Operating Budget vs. Financial Budget. Bizfluent. Taken from: bizfluent.com.
4. Tom S (2016). How to Make a Business Budget. Flare Cloud Accounting. Taken from: flareapps.com.
5. My Money Coach (2018). What is Budgeting? What is a Budget? Taken from: mymoneycoach.ca.
6. CFI (2018). What is Budgeting? Taken from: corporatefinanceinstitute.com.