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Get your businesses finances in gear by keeping track of your budgeting in every little area of cost. From production to staff to equipments and marketing, find out how to make your business more cost effective and relatively more motivated on a financial target driven prospect that can help you to achieve a whole lot more with less capital restriction and more effectively prooven practises.

A budget is a financial plan for the upcoming period. A capital budget, on the other hand, involves an organization’s proposed long-range major projects. The focus of this section is on budget. Public and private entities both engage in the budgetary process. A government budget starts with the projection of sources and amounts of revenue and allocates the potential receipts among projects and legislatively mandated programs based on projected needs and public pressure.

Government entities actually record budgets in the accounting records against which expenditures can be made. A budget is a quantitative plan of operations that identifies the resources needed to fulfil the organization’s goals and objectives. It includes both financial and non-financial aspects. Budgeting is the process of preparing a plan, commonly called a budget. A master budget comprises operating budgets and financial budgets.

Operating budgets identify the use of resources in operating activities. They include production budgets, purchase budgets, human resources budgets, and sales budgets. Financial budgets identify sources and outflows of funds for the budgeted operations and the expected operating results for the period. Some variations of budgets are continuous budgets and continuously updated budgets. Rather than preparing one budget for the upcoming year, in a continuous budget one updates the budget for the following twelve months at the end of each month or each quarter. Such a budget remains more current and relevant. A good budget uses historical data as a base and for reference but at the same time incorporates anticipated costs and volumes based on a comprehensive knowledge and understanding of both internal and external factors that affect the business.

COMPONENTS OF THE MASTER BUDGET

The master budget includes a sales budget, which shows expected sales in units and in dollars. A merchandising firm needs to budget for the goods it needs to purchase for resale; these purchases become its cost of sales. A manufacturing organization’s master budget includes a production budget, which uses the sales budget and

inventory levels anticipated at the beginning and end of the period to determine how much to produce. The production budget needs to be exploded into budgets for direct material, direct labor, and manufacturing overhead. Direct material and direct labour are items clearly identifiable in the finished product. Manufacturing overhead includes all costs of manufacturing except for direct material and direct labour, such as machine depreciation, utilities, and supervision. The direct material budget explodes the production into basic ingredients; quantities to be purchased are anticipated based on expected inventory levels at the beginning and end of the period. With the help of the purchasing department, the prices for the needed materials are computed to arrive at the material purchases budget. The direct labour budget uses industrial engineering guidelines and production needs to estimate labour requirements.

The human resources department provides the labour rates for the skill levels required. Overhead costs are estimated based on production level and appropriate cost drivers (i.e., the factors that cause costs to vary). Some overhead costs are considered variable because they vary with the level of output. Others are considered fixed because the level of output does not affect the amount of those costs. For example, the production supervision cost is assumed to be the same regardless of how much is produced within a shift in a plant. One can, then, estimate production costs and cost per unit for goods to be produced. Cost of goods sold can now be determined based on the inventory levels of finished goods. Selling and general administration costs are then estimated, taking into consideration those costs that vary with sales, such as sales commission, as well as fixed costs that remain the same regardless of the level of sales, such as office rent. The information put together so far gives one all one needs to prepare a forecasted income statement.

At this point, one develops the cash budget. This item starts with cash at the beginning of the period plus cash that will be generated through collection of receivables, cash sales, and other sources minus anticipated minus cash disbursements, which include payroll disbursements, payment for taxes, and accounts payable depending on the terms for payment. The resulting cash balance may be negative—more disbursements than receipts; in this case, one determines borrowing needs. A positive cash balance may be more than needed for operating expense; such excess cash may be deposited in a temporary investment account. The final part of master budget preparation is the forecasted balance sheet, where the anticipated cash balance, investments, accounts receivable, inventory, fixed assets, accounts payable, wages payable, taxes payable, long-term liabilities, and equity accounts are recorded to assure that the two sides of the equation balance; that is assets _ liabilities _equity.

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