Budgets

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Budgets

What Is a Budget?

A budget is an estimate of future revenues, costs, and expenses for a specified future period of time. It is used to compare planned results with actual results. Just like our cartoon buddy ,it is used to see if our business is on target. The Cash Flow Projection we discussed in the prior lesson was actually an example of a Cash Budget.

Static Vs. Flexible Budgets

There are two major types of budgets namely static and flexible. A static budget does not change over the life of the budget. Regardless of changes that occur during the budgeting period, all accounts and figures originally calculated remain the same. A flexible budget is related to business activity such as an increase or decrease in sales or production levels. Both types of budgets are useful for management. A static budget evaluates the effectiveness of the original budgeting process, while a flexible budget matches adjusted budgeted amounts with actual results.

Where do you start ?

The process begins by establishing assumptions and estimates for the upcoming budget period. The sales budget is often the first to be developed because many costs and expenses (variable costs) are related to the level activity. "Mini" budgets are often developed and summarized in an operating budget. An operating budget shows a business’s estimated revenue and the expenses for a specific period of time. It’s very similar to a profit and loss report.

Some mini budgets include:

Sales & Cost Of Sales Budgets

Operating Expense Budgets

Selling and Administrative Expense Budgets

Equipment (Capital) Budgets

What Period Should You Use ?

You should prepare a budget for a year and in addition break it down into months. Why months ? Monthly comparisons allow you to see if your plans are on course thru out the entire year.

What does a simple Operating Budget look like ?

Similar to a Profit/Loss Statement it contains budgeted and actual amount columns to compare budgeted and actual amounts, a difference column, and a percentage of budget spent column.

How are amounts calculated ?

Difference = Actual Amounts - Budgeted Amounts

Percentage Spent = Actual Amounts / Budgeted Amounts x 100

XYZ Company Operating Budget For Period


	Actual	Budget	Difference	% Spent
Revenue
Sales	xxxxx	xxxxx	xxxxx	xx.x
Interest Income	xxxxx	xxxxx	xxxxx	xx.x
Investment Income	xxxxx	xxxxx	xxxxx	xx.x
Other Income	xxxxx	xxxxx	xxxxx	xx.x

Total Income	xxxxx	xxxxx	xxxxx	xx.x

Cost Of Goods Sold	xxxxx	xxxxx	xxxxx	xx.x

Gross Profit	xxxxx	xxxxx	xxxxx	xx.x

Operating Expenses
Salaries & Wages	xxxxx	xxxxx	xxxxx	xx.x
Payroll Taxes	xxxxx	xxxxx	xxxxx	xx.x
Fringe Benefits	xxxxx	xxxxx	xxxxx	xx.x
Health Insurance	xxxxx	xxxxx	xxxxx	xx.x
Retirement Contributions	xxxxx	xxxxx	xxxxx	xx.x
Bank Service Charges	xxxxx	xxxxx	xxxxx	xx.x
Credit Card Fees	xxxxx	xxxxx	xxxxx	xx.x
Equipment Repairs	xxxxx	xxxxx	xxxxx	xx.x
Other Repairs	xxxxx	xxxxx	xxxxx	xx.x
Office Supplies	xxxxx	xxxxx	xxxxx	xx.x
Computer Supplies	xxxxx	xxxxx	xxxxx	xx.x
Professional Fees	xxxxx	xxxxx	xxxxx	xx.x
Utilities	xxxxx	xxxxx	xxxxx	xx.x
Telephone	xxxxx	xxxxx	xxxxx	xx.x
Internet	xxxxx	xxxxx	xxxxx	xx.x
Rent/Lease Payments	xxxxx	xxxxx	xxxxx	xx.x
Subscriptions and Dues	xxxxx	xxxxx	xxxxx	xx.x
Travel	xxxxx	xxxxx	xxxxx	xx.x
Entertainment	xxxxx	xxxxx	xxxxx	xx.x
Licenses/Permits	xxxxx	xxxxx	xxxxx	xx.x
Vehicle Expenses	xxxxx	xxxxx	xxxxx	xx.x
Advertising	xxxxx	xxxxx	xxxxx	xx.x
Depreciation	xxxxx	xxxxx	xxxxx	xx.x
Interest on Debt	xxxxx	xxxxx	xxxxx	xx.x
Taxes	xxxxx	xxxxx	xxxxx	xx.x

Total Expenses	xxxxx	xxxxx	xxxxx	xx.x

Profit/Loss	xxxxx	xxxxx	xxxxx	xx.x

This budget keeps you informed as to how your actual expenses are comparing to your budgeted amounts for the period. As stated earlier using monthly comparisons allows you to see if your plans are on course thru out the entire year.

Where do you get the amounts ?

Analysis of financial statements to aid in determining past experience and trends as a starting point adjusted for any future plans. An excellent example of how you analyze and use prior financial information is illustrated in my Cash Tutorial in the section Cash Forecasts.

What's involved in preparing a Budget ?

Sorry, we don't have a crystal ball to predict the future. Preparing a budget does require some time and effort.

Gather up and analyze your historical financial information, develop and state your assumptions, and select the time period(s) covered.
Estimate sales and other revenues
Identify and estimate amounts for your costs and expenses.
Enter and formally summarize information on worksheet(s).

Is there a "Tool" to aid in preparing budgets ?

Many businesses use excel spreadsheets as an aid in preparing their budgets. This is an excellent tool if you find or make one (if you're familiar with excel) that does more than allowing you to input the information and justs add it up. The example I presented earlier is an example of such a simplified spreadsheet. The good spreadsheets as well as some accounting software allow you to input your prior financial information and use formulas to prepare the budget for you.

As stated earlier an excellent example of a spreadsheet that performs calculations based on user input is my Cash Projection Worksheet illustrated in my Cash Tutorial in the section Preparing The Cash Forecast.

Conclusion

Like a game plan for a sports team, a budget is a plan for your business. It helps you to determine what's doing well and what's not doing so well.