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Example of a budget.
|Rent or mortgage payment||$1,000|
HOW TO: THE EASIEST AND SIMPLEST WAY TO CREATE A MONTHLY BUDGET! 6-MINUTES PROCESS
6 types of business budgets
Here are some of the most common types of business budgets:
1. Master budget
The master budget is a business primary budgeting document and contains all other budgets, financial statements and planning documents. Its used to compile the information from every department and revenue stream to give the business managers a view of the companys financial standing.
2. Operating budget
An operating budget tracks the cost of all business expenses and balances them against the income produced by sales of a product. You can update this budget regularly and compile other budgets to determine net profit and make projections about upcoming sales. These budgets may be more or less complex depending on the number of products and employees a business has. The budgets included in an operating budget are:
A business needs to know how much money is coming in from sales to offset the cost of their operations. You can calculate profits using this number balanced against the companys variable and invariable expenses. For example, a bakery can keep a record of every loaf of bread it sells at $5 and tally the total number of sales to get the total revenue for that quarter.
To predict profits, a company must also predict how much inventory to produce. They might do so by accounting for inventory remaining from their previous quarter, how much they believe they will sell and how much inventory they want to remain at the end of the upcoming quarter. When calculating how much they will sell, they may want to examine sales from previous quarters to make a realistic and educated guess. The production part of the budget often uses units as a measurement instead of currency.
To calculate your production budget, you can use the following equation:
Expected number of unit sales + ending inventory units – beginning inventory units = production units
For example, if a bakery has five loaves of bread remaining from the previous quarter, anticipates selling 10,000 loaves of bread for the next quarter, and wants to have two loaves of bread in inventory, their production budget might look like this:
Starting inventory: 5 units
Sales forecast: 10,000 units
Ending inventory: 2
Units to produce: 9,997
Using the production budget equation, they can calculate 10000 loaves + 2 loaves – 5 loaves = 9,997 loaves to produce.
The cost of the materials can be a useful guide when predicting how many units to produce. You can subtract the cost of materials from the total revenue from the previous accounting period. Determining the cost of raw materials can help convert production units into a dollar amount to be balanced against the rest of the budget. You can use this formula to create your direct materials budget:
Production units x cost of raw materials per unit = cost of raw materials purchased
For example, a bakery needs to purchase flour, eggs and yeast to make their loaves of bread and are looking to make 9,997 loaves of bread. If the bakerys raw materials cost $0.50 a loaf, then 9,997 x $0.50 = $4,998.5 dollars spent for direct materials for the quarter. The budget would look like this:
Total raw materials: $4.998.5
Production units: 9,997
Cost per unit: $0.50
Businesses balance the expense of paying their employees against the revenue from sales. You can create your direct labor budget using this formula:
Number of employees x salary = cost of labor
To convert this number to cost of labor per unit, you can use this formula:
Cost of salary per person in a quarter / number of units produced per person in a quarter = cost of labor per unit
For example, if a bakery has 2 employees, who earn $40,000 a year, each employee will make 10,000 per quarter. $10,000 x 2 = $20,000 for labor in one quarter. 10,000 / 4998.5 (the number of loaves one employee would produce) = $2 per loaf of bread. The budget would look like this:
Employee 1: $10,000
Employee 2: $10,000
Total labor: $20,000
Units produced: 4998.5 loaves per employee
Cost of labor per employee: $2
Businesses pay rent and utilities and any costs associated with selling and administration, and this category of expenses known as overhead.
For example, if the bakerys overhead, including rent and utilities, is approximately $1,000 a quarter, they can subtract this from the overall sales for the quarter. The budget would look like this:
Total overhead: $1,000
This budget calculates the value of products that were produced but not sold. You can get the cost of each item by adding the costs of production, labor and overhead and then dividing that cost by the number of units produced.
Once you have the cost of each item, you can consider whether you can sell enough units to cover your costs. This is the last step of your operational budget because it is the true forecaster of your financial standing.
Follow this formula to find your ending finished goods inventory budget:
cost of materials per unit + cost of labor per unit + (overhead per quarter / units produced per quarter) = total cost of production per unit.
For example, the total cost of one loaf of bread from the bakery would be $0.50 + $2 + ($1,000 / 9,997 loaves) = $2.60 per loaf of bread.
You can multiply the cost per unit by the number of units produced to get your total cost of operations for the time period. To find out if your business is making a profit, you can subtract your total cost of operations from your sales to find out how much profit you made in that quarter.
For example, the cost to make a loaf of bread for the bakery is $2.60, and they project they will sell 10,000 loaves of bread in the next quarter at $5 dollars each. The sales for the quarter would be $50,000, and the total cost for the quarter would be $26,000, meaning they have a net profit of $24,000.
3. Cash budget
Businesses have to budget for how they spend their profits in addition to their operating costs. They track these transactions in the cash budget which monitors the readily accessible funds of a business, called its liquid cash.
Sometimes businesses have negative liquid cash in their budget, but it may just mean that they have made investments for the future of their company. Tracking a cash budget can help you predict when to make those investments so you dont run out of liquid cash. They call this avoiding liquidity risk.
To have an accurate reading of what liquid cash remains at the end of a period, you need to track the following costs:
These are the costs you calculated in your operating budget. They give you your net profit and are the baseline for what liquid cash you have.
Businesses often take out loans or have creditors that need to be paid. These are your financial costs and you can pay them from your liquid cash.
As businesses grow, they might invest in property or equipment to grow their business or improve their product. These are costs that have long-term value and businesses invest in them using the businesss liquid cash.
Here is an example of a cash budget, using the bakery example:
Opening Cash Balance (How much liquid cash you had at the beginning of the period): $10,000
Sales/cash receipts: $50,000
Total balance: $60,000
Cash payments (costs)
Total cash payments: -$51,000
Budgeted ending liquid cash balance: $9,000
4. Financial budget
Companies use a financial budget to track their investments in assets. It includes the cash budget, the capital expenditures budget, and a balance sheet that calculates the remaining value of the business.
Capital expenditures are the cost of purchasing and upkeep for assets like property and equipment and the depreciation of their value. It also accounts for stakeholders equity. Larger companies that own factories or vehicles will have more capital expenditures. Smaller companies may try to avoid them if their cost isnt being offset by sales.
For example, a bakerys capital expenditures might look like this:
Purchase of industrial mixer: -$900
Maintenance of industrial oven: -$2,000
Total capital expenditures: -$2,900
Once you have the total cash budget and the total capital expenditures budget, you can compile them both to form your balance sheet, which shows the businesss total assets for the period.
Cash budget: $9,000
Capital expenditures: -$2,900
Financial balance: $6,100
6. Static budget
A static budget is a budgeting plan that nonprofits, educational bodies or government bodies use because their revenue does not change at the beginning of each period. They rarely change this budget throughout the year. It encompasses almost all aspects of a business budget; however, it does not have to account for sales, so the budget can predict most expenses and financial gains at one time instead of by updating throughout the year.
What is a business budget?
A budget is a financial plan used by businesses to track their income and expenses to predict future profit. Businesses may want to keep track of how much money is being spent on overhead and onetime expenses to identify where they are spending, so they can cut expenses if necessary and increase their profit. They might also use a budget to help identify specific areas where they might increase their income. Companies often maintain a master budget, and departments within a company might create their own budgets for managing their allocation of the companys overall finances.
Businesses can break their budgets down into financial periods, help monitor financial standing and build short-term goals. Typically, a budget will comprise one full year, four quarters and individual months. Companies often revise their budget at the beginning of every year and carry financial growth and profit into the following years to maintain an accurate picture of the flow of money over time. Organizations often leverage budgeting software and online tools to help balance budgets and develop budgeting plans.
Example of a business budget
Here is a complete example of a bakerys business budget:
Master budget for the second quarter
Total balance of last quarter/Opening cash balance: $10,000
Direct materials cost: -$4998.50
Labor cost: –$20,000
Overhead cost: –$1,000
Total operating cost: -$25,998.50
Sales or cash receipts: $50,000
Total Cash Payments: -$51,000
Budgeted Ending Cash Balance: $9,000
Purchase of industrial mixer: -$900
Maintenance of industrial oven: -$2,000
Total capital expenditures: -$2,900
Total balance/opening cash balance of next quarter: $6,100
Why is budgeting important examples?
- Incremental budgeting. Incremental budgeting computes a budget by applying adjustments to the preceding period’s actuals. …
- Zero-based Budgeting (ZBB) …
- Rolling (Continuous) Budgeting. …
- Activity-based Budgeting (ABB) …
- Performance-based Budgeting (PBB)
What are examples of each budget category?
What is budgeting in daily life?
- Housing (25-35 percent) …
- Transportation (10-15 percent) …
- Food (10-15 percent) …
- Utilities (5-10 percent) …
- Insurance (10-25 percent) …
- Medical & Healthcare (5-10 percent) …
- Saving, Investing, & Debt Payments (10-20 percent)