- Tim Spafford
5 Main Types of Business Budgeting
In my opinion, and I can back it up if needed, having a budget is crucial for business success. It helps greatly in managing the capital invested and seeing where it goes. For instance, if you are in need of merchant services but want to keep an eye on how much you spend on them, you might want to check out the pros & cons of cheap merchant services to see which would be the best route to go down so you are mindful of your budget every step of the way. You can work on increasing the profits and using your money more efficiently when you budget. All these goals are achieved with different types of budgets.
Type 1: Master Budget
This type of budget consists of smaller individual budgets that are put together to have an overall picture of the wellbeing of the business. It includes information about assets, profit, spending, sales, etc. showing the progression of these processes and the financial tendencies of the company. If there is a current problem (there must be income from sales but you don’t see it), the master budget may show the reason to you.
Type 2: Operating Budget
An operating budget helps analyze the effectiveness of your business over a certain period of time. It’s important to make it as accurate as possible, that’s why managers include many factors in it (sales, prices, labor and material expenses, production, etc.). To elaborate, take the example of the sales process. Most successful sales departments make use of sales prospecting tools (look these up) to cut down repetitive tasks and close more deals. Such software and tools become part of the operating budget. The operating budget will show you the deeper reasons for a problem or sudden progress, and it’s most often done on a monthly basis.
Type 3: Cash Flow Budget
A cash flow budget generally shows where the cash comes in and where it goes afterwards. It helps greatly to determine whether you use money wisely in your business or whether there is some over expense. It includes payable and receivable accounts in order to find out if the company has enough cash right now to start a new project, for example. Such budgets can be useful before planning a new big thing for your business.
Type 4: Financial Budget
A financial budget focuses on comparing expense and revenue, helping create the best strategy for the right asset, sale, income, and spending management. It gives the managers of a company a comprehensive picture of the heartbeat of the business. This helps determine the future goals to improve the situation or keep it stable.
Type 5: Static Budget
A static budget can’t be altered, no matter whether the sales are increasing or decreasing. Such budgets are usually created once a year to make sure there’s always an unchanging amount of goods in the warehouse, for example.
I know these might sound the same to you at first, but they cover slightly different spheres of financial wellbeing for a business. Managers choose one or several depending on their goals and needs, as well as the information they want to acquire.