BUDGET

A budget is a list of all planned expenses and revenues. It is a plan for saving
and spending.A budget is an important concept in microeconomics, which
uses a budget line to illustrate the trade-offs between two or more goods. In
other terms, a budget is an organizational plan stated in monetary terms.

the purpose of budgeting is to:

1. Provide a forecast of revenues and expenditures i.e. construct a model

of how our business might perform financially speaking if certain
strategies, events and plans are carried out.
2. Enable the actual financial operation of the business to be measured
against the forecast.

Business start-up budget

The process of calculating the costs of starting a small business begins with a
list of all necessary purchases including tangible assets (for example,
equipment, inventory) and services (for example, remodeling, insurance),
working capital, sources and collateral. The budget should contain a narrative
explaining how you decided on the amount of this reserve and a description
of the expected financial results of business activities. The assets should be
valued with each and every cost. All other expenses are like labour factory
overhead all freshmen expenses are also included into business budgeting.
Corporate budget

The budget of a company is often compiled annually, but may not be. A
finished budget, usually requiring considerable effort, is a plan for the short-
term future, typically one year (see Budget Year). While traditionally the
Finance department compiles the company's budget, modern software allows
hundreds or even thousands of people in various departments (operations,
human resources, IT, etc.) to list their expected revenues and expenses in the
final budget.

If the actual figures delivered through the budget period come close to the
budget, this suggests that the managers understand their business and have
been successfully driving it in the intended direction. On the other hand, if
the figures diverge wildly from the budget, this sends an 'out of control'
signal, and the share price could suffer as a result.

Budget types

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

which estimates the number of units that must be manufactured to meet the
sales goals. The production budget also estimates the various costs involved
with manufacturing those units, including labor and material.

Cash Flow/Cash 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.

Revenue budget: The Revenue Budget consists of revenue receipts of

government and the expenditure met from these revenues. Tax revenues are
made up of taxes and other duties that the government levies.
Expenditure budget: A budget type which include of spending data items.
Expenditure budgets may be drafted as fixed / flexible budgets. A fixed
budget is
one which is prepared keeping in mind one level of activity. It is defined as
one
which is designed to remain unchanged irrespective of the level of activity
attained.
In contrast, flexible budget is one which is designed to change in relation

Management Science-II Prof. R.Madumathi

Indian Institute of Technology Madras
to the level of activity attained. Flexible budgets are prepared where the
nature
of business is such that it is difficult to predict the demand/sale of goods

Types Of Budget

• Sales Budget
• Production Budget
• Purchase Budget
• Expenditure Budgets
• Cash Budget
• Master Budget
• Zero Base Budget
• Flexible Budget

Sales Budget

Sales budget is a functional budget. The product wise as well as regional

break
up of sales estimates are incorporated in the sales budget. The sales budget
begins with the previous year actual and incorporates the likely changes

Production Budget

The production budget is prepared based on the sales estimate incorporated in

the sales budget. The adjustments with respect to the opening and closing
stock positions that are policy decisions of the business are then made to
prepare the production budget.

Management Science-II Prof. R.Madumathi

Indian Institute of Technology Madras
Purchase Budget

The purchase budget is another functional budget that estimates the

purchase requirement of materials utilized in the production process. The
purchase budget is based on the production budget and the standard material
consumption requirement for the production estimates.

Management Science-II Prof. R.Madumathi

Expenditure Budgets

Expenditure budgets may be drafted as fixed / flexible budgets. A fixed

budget is
one which is prepared keeping in mind one level of activity. It is defined as
one
which is designed to remain unchanged irrespective of the level of activity
attained.
In contrast, flexible budget is one which is designed to change in relation

Management Science-II Prof. R.Madumathi

Indian Institute of Technology Madras
to the level of activity attained. Flexible budgets are prepared where the
nature
of business is such that it is difficult to predict the demand/sale of goods.
Cash Budget

A cash budget consolidates all the cash inflows and outflows for the business.
The cash budget is also a functional budget. The cash budget helps the
business
to plan the project purchases as well as to provide for the loan requirements.
The
cash budgets also help in defining the repayment plans for short and long
term
loans of the business.
Management Science-II Prof. R.Madumathi
Indian Institute of Technology Madras

The cash budget is based upon the business policy of holding a certain
amount as cash. This is the desired opening cash balance for the business.
Accordingly, the cash budget forecasts the loan requirements or short term
investments that are to be made with excess cash at any specific time.

Master Budget

The overall or master budget summarizes the other functional budgets.

Consolidating the functional budgets, an
income and expenditure budget and budgeted balance sheet are prepared. The
master budget is usually a one-year budget expressing the expected asset
position and capital and liability positions for the projected year.