 Types of Budgeting Although the smallest of small businesses may be able to compile a budget for the business in one document, other businesses commonly split up the budget into areas so that it is more manageable. Such areas will include sales, production, marketing and so on. Once these individual budgets have been created, they will all come together to create the master budget. The following content will highlight some of the main areas of budgeting, how the budgets are compiled, and more importantly, how to use and control them. Not all budgets are listed, but by looking at the ones we have highlighted, it will become clear how other budgets will be compiled.
NOTE: It is important that you appreciate budgets are very specific and unique to individual businesses and therefore some of the content may be inappropriate for your particular business.
As a result, we have specified an alternative approach or highlighted which areas may not be applicable to certain businesses. You should use the following to get a general view of what budgeting is all about and to learn that further advice may be needed (from accountants) to understand the process in more detail.
Usually the first of all budgets to be compiled is the sales budget: this particular budget will be dependant for creating the others. For example, XYZ Ltd is expecting (budgeting) the following sales revenue in the next three months.
(£)
| January | February | March | Product A
| 500 | 500 | 600 | Product B
| 600 | 700 | 600 | Product C
| 400 | 300 | 300 |
These figures will have been calculated by multiplying the expected number of sales by the selling price of the product. If you have close relations with a majority of your customers, you could contact them in advance to find out how much they are expecting to buy from you in the forthcoming budget period.
If you allow credit to customers, it is important that you put all credit sales in the month that you receive the money: not when you made the sale. For example, if you sell a product in January with two months credit, the revenue would be counted for in March and not January.
The above example is assuming the business sells products. If your business sells services, you would do the same by stating how much revenue you would expect to generate from each service.
Again, this particular budget is assuming that the business is product orientated. Should your business be a service, you would use the same approach calling it an Operating Budget.
The production budget is made to ensure the business will meet the expected sales. This budget will be made for the proposed flow of stock using unit numbers instead of financial figures.
The production budget would be split up for the individual products/services if you supply more than one as in the sales budget example (product A, B and C). To prevent the need for individual commentary and illustrations for each (and hence longer content), we will assume that a business only sells one type of product.
For example,
(No. of Units)
| January | February | March | Opening Stock
| 50 | 50 | 55 | + Units Produced
| 50 | 75 | 70 | Less Units Sold*
| 50 | 70 | 60 | Closing Stock
| 50 | 55 | 65 |
* Taken from proposed number of sales determined in the sales budget
This budget will be used to propose how much you will manufacture (or buy in from suppliers) so that you can compensate for the demand (identified on your sales budget). If your maximum capacity for producing stock was, say, 100 units for the month (due to available resources), it may not be necessary to produce this maximum (due to a lower demand) each month because it adds to expense and ties up finance.
If you expect a high demand during a certain month(s), it may be that your manufacturing capacity cannot compensate. In which case, you may budget to manufacture excess in the months where you do not manufacture the maximum so that you can build up your supplies for the expected months with high demand.
Alternatively, it may be a call to buy/hire more machinery/staff in that particular month to allow an increased capacity for production ( see The Capital Expenditure Budget). Article Index
3 Sales and Projection Budgets |
