Did you know that the majority of small businesses don’t even bother creating budgets? It’s true, as the statistics show. Consequently, they suffer from a lack of financial oversight; without budget planning, you don’t know how things go in your organization.
To start planning your budget, first, you need to know that there are several budget types. Then you should see the difference between them. Which budget types to use and when? Are there any examples that better illustrate and explain their usage? Indeed, there are, but first things first.
10 Business Budget Types for Mature Businesses and Startups
Cash is and seems always to be one of the main budget mediums in circulation. That’s why it’s essential to forecast the time and manner in which cash will come and go to and from your business. The budget in cash is usually indicated based on sales predictions and for a specific period, for example, during a fiscal year. This budget type covers different relevant factors, including accounts payable and accounts receivable, to define whether a company has enough cash on hand to start a new venture.
Also, this budget type is used by business owners to make investment decisions. For example, a logistics company may use it to predict whether it is reasonable now to invest in the new equipment or continue operating as is since they overspent money on some last quarter’s activities. Often, organizations make such major investments after taking care of other “cash-requiring” expenses, such as social security and (or) charity ones, and may need additional funding, whatsoever, in the form of loans at favorable repayment terms.
Business owners usually resort to this model to estimate profits and expenses within a specific period. The model includes various factors for immediate consideration, including labor, production, administration, overheads, and other costs. Operating assets may be analyzed weekly, monthly, quarterly, yearly, or on some other basis, depending on the business goals. When done regularly, this analysis helps to determine where money is “drying up,” meaning that it may be overspent.
Organizations often prepare an operating budget report at the beginning of the year. Then compare the operating, expected budget with their actual budget throughout the year to see where they are in their journey to the goals set, defining where they are failing and what can be corrected in these cases. In other words, the operating budget report helps to understand if the budget at hand is spent according to the initial plan.
A financial budget is a balance sheet that reflects the organization’s strategy in managing finances, including profits and expenses. The document gives a general understanding of how the company spends money, how it correlates with its revenue and helps to plan capital for short-term and long-term needs.
Additionally, the current financial budget shows how stable the company is; a positive budget indicates a healthy organization, and a negative budget indicates certain issues. One can use the financial budget in M&As, IPOs, or when looking for investments.
Sales budget helps to forecast sales either in their quantity or value based on the organization’s operations. For example, when the organization produces equipment for sale, it’s wise to make measurements in quantity. Or, if it produces convenience goods, the business value should be the medium of measure.
Improper sales forecasting or its absence would affect the organization’s performance, mainly the availability of materials, since it wouldn’t be properly estimated (if estimated at all).
Based on the sales budget, a product budget can be prepared. Among the other aspects taken into consideration are the organization’s stock levels and manufacturing program. Usually, this type of budget is used to determine the production costs that affect the end product’s price. However, every organization has its own type of production budget.
For convenience, business owners divide the production budget into articles produced per month, including the estimates of the likely demand generated. The point is to constantly adjust the production budget to the volatile market conditions, i.e., when the sales and demand go up or, otherwise, down.
This budget type includes all the production costs involved for a specific period of time. These costs cover labor, direct and indirect expenses, and all other related expenses. In essence, this is a collection of all the organization’s overheads. Usually, a designated department prepares an overhead budget document to control costs efficiently.
A personnel budget is your staff costs over a certain period. It includes workers’ grades, labor hours, and other related costs. It’s not a secret that the efficiency of any operation depends on how well the employees are compensated, so the personal budget is one of the crucial budget types.
Specifically, the personnel budget helps to determine “weak spots” in production, meaning how many workers are needed to increase the production level and then plan the personnel budget for these employees accordingly. Or, the organization needs particular employees during a specific time or season – again, the personnel budget must be planned.
The personnel budget helps determine what skills and experience level you can afford with the current budget to achieve the goals set and then plan the payroll for these employees.
The type of budget is entirely planned and allocated in the organization’s marketing department. It covers all the promotional and marketing activities that assist the sales team in generating more leads and sales.
Based on the marketing budget, the department plans a certain number of marketing events and other activities to perform in the following fiscal year.
A fixed budget consists of the revenue and expenses that remain unchanged over a certain period, involving warehouse costs, supply costs, maintenance costs, and more. This budget can’t be affected by the factors like sales volume or changes within the organization. It is convenient for setting goals that are independent of money. Usually, educational establishments, NGOs, and government institutions use the fixed budget to allocate it for certain activities.
Finally, the master budget consists of all of the company’s budgets complementing its full financial image. All departments’ budgets contribute to the master budget. In this way, the master budget establishes and maintains relations among departments. And the larger the organization, the more importance is attached to this type of budget.
For example, the organization is large and has multiple divisions and even branches. In this case, the master budget is created at a high level for the organization’s management team to forecast its profits and expenses for the coming fiscal year. The profits are divided by specific equal periods, such as months or quarters. Moreover, this budget type helps to see how profitable a particular division is.
On the other hand, smaller organizations may create the master budget in the form of a spreadsheet or replace it with software solutions for budgeting to prevent or, at least, minimize errors.
A budget defines your roadmap. It helps you predict your money flow and detect areas that need improvement. Success is never-stopping work that requires you to invest much time and effort into planning and creating budgets. Budget planning is a good way to evaluate your current performance, see where you are, and how well you achieve your goals.
If you are new to budget planning, with no “past-performance” figures to rely on, look at your competitors; you can get insights from their experience. Also, make sure to learn and understand the budget’s components. With all these data, you will have better chances to create a good first budget as a good start to your ventures.