Budgeting is an important accounting tool which is used by all the companies across the world to run their business successfully. It is a financial roadmap for business operations. All the big companies have a separate account department or finance department to prepare a budget and spend the amount accordingly. Small businesses, which cannot afford to establish a separate account department, also spend their amount according to a planned budget.
Significance of A Budget
We all are familiar with the proverb "Cut your coat according to your cloth". It means we should spend according to our Income, and this can be done through a proper plan or budget. A budget helps in capital management. It is a detailed analysis of the way a company plans to spend its capital in the near future. It allows a business to set a limit on the amount to be spent for different purposes. Budget ensures proper use of the capital. It discourages expenditure on unnecessary items.
Moreover, a budget also helps the company to avoid previous mistakes. By reviewing the last year's budget and the output, a company can recognize the positive and the negative sides of their budget. It can realize how to distribute the capital to generate more revenue in the coming period.
Budget is also an important tool to outline future growth and expansion plan. A budget reflects the financial position of a company. It helps the company to take any financial decision quickly. There are five different types of the budget for businesses, namely Master Budget, Operational Budget, Cash Flow Budget, Financial Budget and Static Budget.
• Master Budget- The master budget is an annual budget planning document for the company covering all other budgets. It concurs with the financial year of the company and may be divided into quarterly budgets or monthly budgets.
Usually, a company develops the master budget every year under the Budget Director.
• Operating Budget- Operating budget is a detailed projection of all expected income and expenditures based on anticipated sales revenue in a given period. It is usually composed of several sub-budgets. It is a short-terms budget, where capital outlays are excluded as they are long-term costs.
Operating budget is useful when a company is trying to work out how much you can spend on a project.
• Cash Flow Budget- A cash flow budget is a sequential synopsis of expected income and expenditures for a particular period. The cash flow budget is very much similar to operating budget.
• Financial Budget - Financial budgets are financial strategies which are structured to detail estimations on incomes and expenditures on long-term as well as a short-term basis.
• Static Budget - A static budget does not change with the change in volumes. The budget is fixed for the given period. Therefore, even if there is a significant difference between the actual sales volume and the expected volume, the amounts listed in the budget are unaltered.
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