Creating a budget is a must to stay on track and keep expenses in control. Proper budgeting can help businesses spend less and derive the most value from each expense. A budget also enables you to predict uncertainties and prepare for any potential disruptions in the future. So – what type of budget should you prepare for your business?
Entrepreneurs can go for different types of budgets based on their needs and operations. There is no one-size-fits-all solution, and your circumstances will determine the best way ahead.
Here are some of the most common budgeting methods you can try out for your organization.
An operating budget is a forecast of revenues and expenses a business will make in a fixed time. You can prepare an operating budget for the coming year to spend within plans. Operating budgets are also helpful to forecast your income and expenses for the future.
Generally, you will prepare this type of budget at the start of the year. However, you will also need to make regular updates periodically based on current situations.
An operating budget includes elements like:
- Fixed and variable costs
- Capital costs
- Non-operating expenses
Cash Flow Budget
A cash budget is a prediction of cash flow your business can experience over a fixed time. You can create a cash budget for the next year, month, or even week.
Businesses need to estimate their payables and receivables to create a cash budget. It can help them determine if the business has enough liquid cash to carry on operations. A cash budget also enables you to predict surplus and allocate money wisely.
Moreover, you can make out the profits or losses you may earn based on your cash flow budget.
Direct Labor Budget
A business will need employees to work and produce goods. As a result, entrepreneurs need to account for their labor costs as demand can change at any moment.
A direct labor budget lets you estimate the cost of your labor. You need to create monthly labor budgets that help you understand when you need to hire or lay off staff. In addition, a direct labor budget can help businesses make an idea of product expenses and calculate profit.
You will need first to determine your future demand to create a labor budget.
A financial budget is a must to understand how much capital you will need in the short and long term. You can estimate crucial finances by preparing a financial budget like:
- Capital expenses
- Cash budget
- Assets and liabilities
Financial budgets focus on the items in a balance sheet to determine your business’s financial health. In addition, the insights of this type of budget will also drive your strategic plan.
Therefore, businesses must prepare a financial budget to predict and determine future financial activities.
A master budget is the collection of lower-level budgets of your business. It includes all the predictions in your financial and operating budget and acts as a planning document. You can also include any budget based on unique functional areas your business serves.
Some common elements of master budgets are:
- Sales budget
- Labor and materials budget
- Costs of goods sold budget
- Administrative budget
Businesses can create yearly master budgets to plan their activities. You can also break down your budget into months and quarters.
First, prepare your operating budget, then your financial budget, and use the insights to create your master budget.
This type of budget can come in handy if you are a non-profit or in the education industry. A static budget lets you estimate your fixed expenses and revenues for a period of time. You can also use the line items of your budget as performance metrics, as your sales do not influence them.
Businesses need to predict their future expenses and revenues to prepare a static budget. However, you are not going to update this budget even if the figures don’t represent actual costs or revenues.
Final Thoughts on Type of Budget
Your unique business needs and operations will determine the type of budget that works for your business. However, some of the budgets like cash, operating, and financial budgets are crucial, no matter the size of your business or industry. Always prepare a well-documented budget so that you can avoid spending more than you plan.