Article: Joseph Jobst


The Small Business Library

Last update: December 4, 1999

Build Your Business With A Better Budget

Making business decisions is not always cut and dry. You must often decide between several answers to any one problem. You may be faced with a good, better and best decision, but not always a clear cut right or wrong.

HOW YOU DECIDE
Use your accounting information for organizational planning and decision making. Financial and managerial accounting reports are used by managers within a company to make decisions about running the business.

THE OPERATING BUDGET
Operating budgets are the core of any business plan because they deal with the day-to-day functions of a business. Determining how much is to be spent on what items is the main goal of the person creating these budgets. The budget will help you determine the amount of resources you need to get the product out the door, or the service to the customer.

The focus of operational budgets is on managing, both for the future and for current operations. Of particular importance in managing is planning, budgeting, and monitoring of performance. The management process engages you in a series of activities that include establishing financial and non-financial goals, developing operational plans to meet the goals, and preparing budgets to reflect the operational plans. Following that you execute the plans, record performance and, finally, adjust operations to respond to actual circumstances.

There are five basic types of operational budgets that are needed to forecast the costs involved with running a normal business. They are: sales budgets, production budgets, operational expense budgets, budgeted income statements, cash budgets.

  1. SALES BUDGET
    Your sales budget is your main operating budget and is the budget upon which all others are based. The sales budget is the prediction of what the company thinks it can sell. If your prediction is too high, the company may spend too much money. Likewise, if your prediction is too low, sales could be lost because not enough of the product would have been produced to meet demand.

  2. PRODUCTION BUDGET
    Your production budget is actually a set of budgets that forecast expenditures, and predict spending for materials, labor, and projected overhead. The production budget does not always closely follow the sales budget due to seasonal changes. Items such as Christmas cards and swimsuits are seasonal and sold only a few months out of the year.

  3. OPERATING EXPENSES BUDGET
    An operating expense budget is your plan for spending on the items that help keep the business running, such as office supplies, rent, utilities, and telephone services. An operating expense budget is usually developed for each functional area of the business including selling, advertising, research, human resources, and administration. The operating budgets, along with the sales budget and the production budget, are used to make the budgeted income statement.

  4. BUDGETED INCOME STATEMENT
    Simply a statement summarizing the different revenues and expenses in a given period. You use it to show the effects that all the other budgets have on revenues, expenses and net income.

  5. CASH BUDGET
    You use a cash budget for cash planning and control. It forecasts the inflow, as well as the outflow, of cash for a given period. A cash budget helps managers maintain cash flow, and make sure business needs are being met. It also helps management avoid having idle cash or cash shortages.

CAPITAL BUDGETING
Capital budgeting is determining how much money is to be used for long range expenditures of the business. Developing capital budgets can be very difficult and sometimes costly. Since decisions about capital budgets are made based on estimates of future operating results, it is difficult to estimate properly, i.e., not too high or too low. It is also difficult to change a capital budget once it has been set in motion. It can end up costing the company money if the estimates were too high.

In short, the capital expenditures budget is a long term plan for a company's investments in plant and property, and other long term investments. The capital expenditures budget usually involves a lot of money, and decisions that have far reaching consequences. The capital expenditures budget directly affects nearly all other budgets, not to mention most aspects of running the business in general.

Each of these budgets focuses on a specific area of your business, and each of them, both individually and collectively, can help you plan better and make better decisions for the life of your business.