Written By: MB Group
Regardless of your sector or industry, one adage remains true: if you fail to plan, you're planning to fail. To help you avoid the unfavorable outcomes associated with foregoing financial planning, it's best to create budgets for both internal and external reasons. Budgets are ideal for helping you make more informed decisions in regards to sales, purchases, and virtually every other business decision. At the same time, maintaining a budget can be used to secure business loans as well as attract business loans. Let's take a closer look at a few of the types of budgets regularly used when creating financial plans.
As the name suggests, the master budget is created by aggregating and collecting information from your other budgets. This comprehensive budget can be used to offer a broad look at your business expenses and revenue on quarterly as well as monthly basis. For larger organizations, a master budget can be critical in helping make key decisions and answer tough questions, such as how well a particular division fits within the larger business.
The operating budget, formatted as an income statement, is established based on your sales forecast. In the most simple sense, your operating budget will be your sales revenue minus cost of selling, cost of goods, general expenses, and administrative expenses. The number you're left with is the net profit. The operating budget is ideal for determining what you'll need in sales revenue and the potential expenses your company will incur to support this level of sales — all while hitting your profit goals.
The financial budget offers you a unique perspective on past expenditures and revenues. The financial budget extends past revenues and expenditures to include liabilities, assets, as well as stockholder equity. All of this information is neatly presented in a balance sheet, which can offer insight into the health and vitality of your business. This budget can be especially important when entering a merger, seeking funding, or offering an IPO.
The cash flow budget offers immediate insight into all expected cash outflows, such as expenses, and inflows of cash, such as receipts. The cash flow budget is regularly used for financial planning and can demonstrate whether your business will have sufficient funds to meet your monthly expenses over a target period of time. If you fall short, your cash flow budget can highlight when as well as how much you'll need to meet your expenses. This way, you can proactively take proper corrective action, such as seeking out a line of credit or loan to sure-up your cash flow shortage.
If you have employees, the labor budget can be a critical report used to provide insight. The labor budget is used to calculate the number of labor hours needed to produce the number of items in the production budget. The more complex labor budgets can be used to not only tabulate the number of items required, but can differentiate this information by labor category. In either case, you can use this information to properly plan for your payroll costs. Another key application of the labor budget is for employers to prepare for the expense associated with seasonal workers.
If your business has predictable expenses and sales, you may benefit from the creation of a static budget. As the name suggests, a static budget doesn't change throughout the year. Because of this, it can be instrumental in spotting variations between what's budgeted and the reality. Many businesses implement the static budget to evaluate sales performance. At the same time, static budgets are used by finance professionals, accountants, and management teams to gauge the financial performance of the company or business over a period of time.
At MB Group, we are a team of seasoned CPAs and accountants who specialize in helping businesses strategically plan for the future. We offer a range of different financial planning and budgeted services designed to help you chart the best path forward.
Contact the team at MB Group today to learn how we can help.
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