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What are all of the required components of preparing a budget

Share Budgeting is a process whereby future income and expenditure are decided in order to streamline the expenditure process. Budgeting is done in order to keep track of the expenditures and income. It serves as a monitoring and controlling method in order to manage the finances of a business.

Major Components of a Master Budget

It begins by deciding upon the financial goals according to which the budget will be made. Other important activities in the budgeting process include things such as forecasting, monitoring, controlling and evaluating the financial goals.

Budgeting process is very crucial for any business entity. Without a proper budget, a business can never keep track of how much it has earned and how much it has spent. Budget serves a great guide by which a business can oversee its income stream and can identify potential dangers to it beforehand. Furthermore, budget acts as a valuable tool in order to take control of how a business spends.

A budget makes sure that all the money is being spent in the right direction and financial goals are attained. Some of the important aspects of the budgeting process are discussed as follows. However, two of the most important approaches to budgeting process are: Top-Down Budget In the top-down budgeting process, the primary input is made by the top-level executives of the business.

3 components of a budget

The echelon of a certain organizational hierarchy lays down all the guidelines according to which budget will be made. They outline the financial goals that a budget should maintain. Moreover, guidelines related to sales budget, compensation, etc. The lower level management is given the least amount of participation in the budgeting process.

They are only involved in executing these guidelines. Although the upper-level management gives out the general guidelines related for a budget, however, employees and the lower management formulate these budgets. Each division of the organization forms its budget in accordance to the general guidelines. In the end, the budget of the entire organization is formed by combining the individual budgets of each division.

  • I use Excel to budget;
  • Validate bonus plans In order to maintain the morale of the employees, bonuses are frequently given to out motivated workers;
  • The lower level management is given the least amount of participation in the budgeting process;
  • Then whatever you have left will filter down through the categories;
  • You can total your income and expenses by month to show your net income or loss each month.

The bottom-up approach for a budgeting process is highly inclusive in nature. The employees overall tend to be much more committed to working under the budget in this approach. This is due to the fact that employees have participated in drawing up a budget and therefore they know that the budget is very acceptable. Various components of the budget are discussed as follows: Sales Budget Sales budget outlines the forecasted income stream of the business. It is usually the first budget to be prepared as the revenue generated will ultimately determine the level of expenditure.

Under the sales budget, sales of the business are forecasted. Sales are forecasted in terms of sales volume and the sales revenue. The forecasting is done on the following basis: Previous pattern of sales Economic conditions e.

  1. Thus, budgeting greatly facilitates the formulation of strategies by outlining the available funding in advance. Share on Facebook A master budget contains all of the other budgets within a business.
  2. It's useful to work out the relationship between variable costs and sales and then use your sales forecast to project variable costs. Create realistic budgets Use historical information, your business plan and any changes in operations or priorities to budget for overheads and other fixed costs.
  3. Understanding the basic elements of a small-business budget will help you create one that helps you keep your business on track from month to month.

Production Budget The production budget is of high importance in the overall budgeting process. It determines the number of units of a product that will be produced by the business. It also determines the cost at which the products have to be produced. Production budget is made according to the sales budget.

Required sales units, opening inventory and required closing inventory are used to reach the number of units that have to be produced in a budgeted period. Direct Material Purchases Budget Direct materials, like the name suggests, are the ones that are being used directly in the production of goods. The budget related to direct material determines the amount and cost of these resources that will be required in the production activity. They are then combined under a single head.

The direct labor budget is prepared. Labor that participates in the production process forms the direct labor cost. This budget is prepared according to the number of labor hours and the cost per hour. Overheads are those costs that are not incurred directly in the production of goods, but are indispensable with regard to the production activity e.

The budget of the overhead cost is prepared in relation to the direct labor hours. They consist of fixed and variable costs. Cash Budget Cash is known to have a similar importance to a business as blood has to body.

No matter how successful a business is, if it runs out of cash, its survival is seriously jeopardized.

What Are the Essential Parts of Developing a Budget?

In order to ensure smooth operations of the business, strong emphasis must be laid upon the development of cash budget. Cash budget helps to formulate in advance the payment and receipt cycles of the business and thus it ensures that cash is readily available to a business.

By formulating cash budget, the business can keep track of its accounts receivables and accounts payable. In order to avoid shortage of cash, the business can arrange its credit plans related to accounts receivables and accounts payable accordingly. Budgeted Financial Statements Budgeted financial statements are prepared on the basis of each budget component. These budgeted financial statements are called pro forma financial statements. Through the budgeted financial statements, a business will be able to forecast its profits.

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Profit forecasting is important because it will determine the viability of carrying out the business. A step-by-step guide to the budgeting process is given as below.

Update budget assumptions Budgets are always prepared on certain assumptions. Those assumptions could be related to the sales trends, cost trends or environmental conditions. Before embarking on preparing the budget, these assumptions must be thoroughly reviewed according to the recent environmental conditions. Note Available funding Limited funding can greatly hinder the growth projects of the business.

Therefore, in the preparation of budgets adequate attention has to be given to the available funding as the availability of investable funds will what are all of the required components of preparing a budget the initiation of viable projects. Step costing points The business environment is subject to dynamism. Every day it is posed with challenges that can completely change its cost structure.

Therefore, in the budgeting process certain factors that can affect the costing for the business should be closely considered. These factors should be identified beforehand in order to make the budget realistic.

Create budget package In budget package, previous standards related to the budgeting process are taken in order to formulate a budget for the current period. Previous standards are updated according to the recent environmental conditions.

Budget package is a kind of outline according to which budget has to be prepared. Obtain revenue forecast There is no denying the fact that sales budget is the most crucial budget of all. All the budgets are based on the sales budget. Furthermore, sales budget determines whether the business is generating enough revenue necessary for its survival. Therefore, adequate attention must be given to the preparation of sales budget by forecasting demand accurately.

Obtain department budgets The department budgets will help to reach a budgeted expenditure for the budgeted period.

Budgeting Process: Complete Guide

Each department will prepare its own budget and then all of them will be combined to become a part of the master budget. Validate compensation Compensation plans are a significant component of the budgeting process. As compensation is subject to an annual increase, therefore, it should be prepared with great care. The approval for compensation increase should first be taken from the top management, and then it should be augmented in the budgeted compensation plans. Validate bonus plans In order to maintain the morale of the employees, bonuses are frequently given to out motivated workers.

Bonuses act as an appraisal method. Bonus announcements that are not considered in the budgeting process can create havoc in the profits of the business. Therefore, any bonus plans should be taken into consideration beforehand. The top management should be consulted for any bonus plans. Obtain capital budget requests Capital expenditure ensures expansion of the business.

Budgeting and business planning

It helps the business to avail the opportunities necessary for business growth. Any capital expenditure plans should be taken in advance, and they should be included in the budgeting process accordingly.

Update the budget model Any changes in the assumptions of the budget model should be updated, and final budget should be prepared accordingly.

What Are the Factors for Preparing a Budget?

A delay in this may lead to glitches later on that could cause confusion. Review the budget The budget should be reviewed thoroughly once it is prepared in order to correct any flaws.

A little decimal placed wrongly can create quite an unbalance in the budget sheet. Obtain approval The budget should be presented to the top management. They will evaluate whether it has been prepared according to their requirements and finally l approve it if it does not need any changes.

Issue the budget The budget should be formally issued after its approval. All the operations there and then will take place according to it. They provide a coherent guideline according to which the business operations should be run. The budgets set targets for costs and revenues, targets that can then be achieved through a variety of ways. Strategy Requires Funding Budgets help to formulate the capital expenditure plans of the business.

  • Any capital expenditure plans should be taken in advance, and they should be included in the budgeting process accordingly;
  • If after you record your budget details you have more expenses than income, that's a more serious problem that requires you to reduce expenses and possibly identify new ways of making money;
  • When preparing a budget you need to focus on your net income, not gross.

The available funding is always the first thing that is sought for in budget preparation. The available funding determines the kind of capital expenditure plans that a business can opt for. Furthermore, by knowing this in advance the business can decide upon the strategies that it can follow.