Types of budget: From sales budget to cash budget!

A budget is a planned estimate of a company’s expenditures and income for a specific time. Planning of budget depends on earlier decisions made during the long-term planning procedure. While planning helps to determine future actions based on an organization’s objectives, control assists to look back to compare what happened in the past with the intended results. Since the budget is produced for the future and is based on previous events, it is seen as an effective planning and control tool. The next section explains all types of budgets from sales budget to cash budget required for financial planning and control:

1. Sales budget

A sales budget is a financial plan that estimates a company’s total revenue in a specific time period. It focuses on two things—the number of products sold and the price at which they are sold. This budget predicts how the company will perform. Plus, it serves the starting point for the development of a comprehensive master budget.

2. Production budget

The production budget is a financial plan that calculates the number of items to be manufactured to meet the sales projection for a given time. The development of a production budget aids in the firm’s production stabilization, which eventually leads to cost savings in the procurement of raw materials and capital usage.

3. Purchase budget

A purchase budget contains the amount of inventory that a company must purchase during each budget period. The amount stated in the budget is the amount needed to ensure that there is sufficient inventory on hand to meet customer orders for products.

4. Direct labor cost budget

The direct labor budget calculates the number of labor hours needed to produce the units itemized in the production budget. Further, a more complex direct labor budget estimates not only the total number of hours needed but will also break down this information by labor category. The managers of the respective departments prepare this budget.

5. Operating expenditure budget

The expenditure budget includes all the costs related to selling, distribution, and shipment of products to customers.

6. Cash budget, budgeted income statement, and financial statement

The cash budget is based on the above-mentioned budgets. It includes planned inflows
and outflows of cash for a specified time. The cash budget is also essential to plan probable financial cash deficits and to prepare an
investment plan so that the excess cash is put to profitable use.

After preparation of all the budgets, budgeted income statement, and budgeted statement of
financial position are prepared. These statements show the overall planned performance of the organization for a given period. It is one of the most important planning tools for top-level management. Not only does it depict overall profitability but also portrays the asset and liability position of the
organization within a given period. Also, it is the tool for measuring organizational performance
to attain better efficiency.

Summing up, the master budget assists to control and use of organizational resources for profit optimization. Thus, it is the tool for the achievement of the long-term goals of the organization. It

Suggested: Break-even analysis and break-even point!