Type and Purpose of Budgets
Type and Purpose of Budgets
Types and Purposes of Budgets
Master Budget
- A master budget is a comprehensive budgeting plan that includes all other budgets and financial forecasts.
- Aids in coordinating various business activities and aligns them to realise business objectives.
- Good for gaining a holistic understanding of a business’s plan for the upcoming accounting period.
Operating Budget
- An operating budget outlines expected revenues and expenses within a specific period.
- Useful for predicting cash flow, guiding day-to-day operational decisions, and setting financial goals.
- It covers various components including sales, production costs, and overheads.
Cash Budget
- A cash budget is a budget focusing on a company’s cash inflow and outflow.
- It’s vital for ensuring the company has sufficient cash to finance its operations and manage short-term financial obligations.
- Enables businesses to plan for future financing needs and manage liquidity risks.
Capital Expenditure Budget
- A capital expenditure budget outlines the planned investments in long-term assets such as machinery and property.
- It helps in capital rationing as it ranks various investment proposals based on profitability and risk.
- It provides a roadmap for significant financial commitments and their ultimate impact on future profitability.
Static and Flexible Budget
- A static budget remains unchanged regardless of changes in output or sales volume.
- A flexible budget, conversely, adjusts based on changes in business activities or output.
- Both budget types have their places: static budgets can be useful for control, while flexible budgets adapt to changing business conditions and are better for performance evaluation.
Zero-Based Budgeting
- Zero-based budgeting (ZBB) involves justifying every expense for each new period, starting from scratch.
- Promotes cost efficiency, critical thinking, and resource allocation based on needs and benefits.
- It can be time-consuming but is effective for controlling costs and curbing wasteful spending.
Activity-Based Budgeting
- Activity-based budgeting (ABB) focuses on budgeting around business activities.
- It enables more accurate cost attribution by considering the resources consumed by each activity.
- This method can enhance cost transparency, promote efficiency, and support strategic decision-making.