Within a company there are different types of budgets, and the central objective of all is the same: they are financial plans for a period of time, usually a year. Budgets must be adapted to the company's departments and are used to organize the available financial resources, and thus be able to design future actions.
Therefore, the budget has to include all the elements and areas of the company. The different specific budgets for each department are finally united in a single budget called the master budget, which reflects all the financial activity that the company expects to have..
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Some of the objectives of the budgets are the following:
- Control available resources.
- Communicate plans to company managers.
- Motivate managers to meet budget targets.
- Evaluate the performance of managers.
- Give visibility to company performance.
- For accounting reasons.
Therefore, the main objectives of budgets could be summarized in three:
- Serve as a forecast of income and expenses; that is, build a model of how the business should act if certain strategies are carried out.
- Being able to measure the real performance of the company against the expected one, and see differences.
- Set a cost constraint for a specific project.
Businesses generally use many types of budgets, depending on their economic activity, size, and other factors..
The most common ones in all of these will be named below, which are: the master, the operational, the cash flow, the treasury (formed by the expenses and collections) and the production, which includes the purchases.
The master budget is the set of individual budgets of the company. Serves as a presentation of the complete picture of your activity and financial health.
This budget combines factors such as sales, operating expenses, assets or sources of income, to allow companies to set objectives and evaluate their overall performance..
This type of budget is usually used in large companies, in order to control and keep the different managers aligned.
The operational budget is a forecast and analysis of the estimated income and expenses during a certain period of time.
To create an accurate image, these estimates must take into account factors such as sales, production, labor costs, material costs, production costs or administrative expenses, among others..
These budgets are usually created weekly, monthly or annually, in order to compare the actions with the forecasts and to glimpse possible errors.
This budget is a means of projecting how and when cash enters and leaves the business during a specified period of time. It can be useful in helping a company decide if it is managing its funds correctly.
The cash flow budget considers aspects such as payments and collections, in order to see if the company has enough flow to continue operating, if it is using it productively or if it is likely to generate more liquidity in the future..
This budget is in charge of controlling, monitoring and making forecasts of the money available in the organization. It is made up of other budgets: the collection budget and the income budget..
Making a treasury plan allows the company to know how much money it has for its operations.
Keep in mind that charges and expenses are not always made at the time of sale or purchase, so keeping this budget up to date helps to control at all times how much money you have, despite not having collected it or still spent.
Within this we find two types:
The collections budget is part of a larger one: the treasury budget. In this collection budget, the money inflows into the company must be taken into account.
It does not mean the same as income, which would be the increases in equity that come from sales. That is, the income is obtained at the beginning of the relationship but the collection may not take place until months, or even years later, depending on the agreement.
Therefore, the collection budget must keep the deadlines set for collecting the debts of which we are creditors up to date..
This budget is in charge of keeping company expenses up to date. Here the company focuses on the possible money outflows that it will have in the future. This will help you make decisions regarding goals..
Some information that this budget should carry would be the products and services that are consumed in the company and the purchases planned in units and in monetary value.
This budget is in charge of estimating how much the company has to produce. It is related to the previous one (sales), since it must take into account what is sold to know how much to produce.
This document has to consider raw materials, tools, labor costs and possible professional services expenses, if any, among others..
It is the budget that is responsible for estimating the purchases of raw materials for the production area.
For this, you must have the sales budget, in order to get an idea of the estimated sales to be achieved, and thus be able to buy the raw materials necessary to produce them..
This budget must have all the data related to the purchase of raw materials, such as the current inventory, the unit cost of raw materials and the necessary quantity of them..
This budget is responsible for estimating the sales that the company will have in the future. With this estimate it will be possible to make the purchase budget and, therefore, the production budget..
Some of the data that the sales budget document should include are the products that the company sells and the expected sales of the company and the industry.
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