Creating an operating and financial budget represents a crucial step for successfully managing your business. You can work with several different types of budgets on a weekly, monthly or yearly time frame to monitor your business's financial health. When all of the components of a budget are combined to give a financial snapshot of the entire business, not just a particular department, the result is known as the master budget.
The master budget provides a comprehensive view of a business's finances. It incorporates budgets from all departments.
Different Types of Budgets
Five major types of budgets exist, but your business does not necessarily need to use all of them to be successful.
- The financial budget takes all of the company's assets into account, including stocks and any investments. Financial budgets show whether or not a company has enough income and financial health to manage all of its expenses. This is a "big picture" budget.
- The operating budget focuses primarily on expenses and offers a detailed report of all the items needed to keep the company operational.
- A cash flow budget looks at the company's income and expenses to ensure you meet all your financial obligations without delay. This tends to be a weekly or monthly budget that deals with the current state of affairs.
- A static budget shows expenses that tend not to fluctuate over time. For example, office rent is a predictable expense that does not change from month-to-month.
- An operating and financial budget meets the needs of most companies, but all the budgets prove useful in various circumstances.
- The master budget combines all types of budgets from all departments to create one large, comprehensive and detailed budget that showcases the entire company.
What Are the Components of a Budget?
The essential components of a budget can be summed up in several ways, including predicted and actual amounts. When creating a budget, use the company's existing financial data to predict expenses and income. Then, typically on a daily or weekly basis, the actual real-time figures are added. When a substantial difference exists between predicted and actual figures, you know you need to develop a strategy for either reducing your spending or increasing the company's income.
Each budget will need a column for estimated costs and actual costs, plus a column for tracking the difference. You'll also use your master budget and operating and financial budget to track your profit or net income which is the total income less total expenses.