Budgets help businesses track and manage their resources. Businesses use a variety of budgets to measure their spending and develop effective strategies for maximizing their assets and revenues. The following types of budgets are commonly used by businesses:
A master budget is an aggregate of a company's individual budgets designed to present a complete picture of its financial activity and health. The master budget combines factors like sales, operating expenses, assets, and income streams to allow companies to establish goals and evaluate their overall performance, as well as that of individual cost centers within the organization. Master budgets are often used in larger companies to keep all individual managers aligned.
An operating budget is a forecast and analysis of projected income and expenses over the course of a specified time period. To create an accurate picture, operating budgets must account for factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and administrative expenses. Operating budgets are generally created on a weekly, monthly, or yearly basis. A manager might compare these reports month after month to see if a company is overspending on supplies.
Cash Flow Budget
A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period. It can be useful in helping a company determine whether it's managing its cash wisely. Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood of generating cash in the near future. A construction company, for example, might use its cash flow budget to determine whether it can start a new building project before getting paid for the work it has in progress.
A financial budget presents a company's strategy for managing its assets, cash flow, income, and expenses. A financial budget is used to establish a picture of a company's financial health and present a comprehensive overview of its spending relative to revenues from core operations. A software company, for instance, might use its financial budget to determine its value in the context of a public stock offering or merger.
A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue. A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage, regardless of how much inventory it moves in and out due to increased or decreased sales.
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