A company’s master budget has limitations in terms of available funding to keep the business operational. The limitations are based on the company’s general income from sales, marketing and investors and the business’s desire to avoid going into operational debt. The term “budget capacity” refers to the limitation set by company executives.
Budget Capacity Definition
The term “budget capacity” refers to a company’s ability to utilize money and workforce when producing goods or offering a service. The word capacity does not mean the company must spend every available penny, but refers to the amount of services or products produced with the given budget that meets the company’s quality standards and regulations. If a budget allows $10,000 in monthly production, but the company can only produce $9,950 in products with the given quality standard, $9,950 is the budget capacity.
A budget’s capacity is not always expressed in terms of numbers and figures. The capacity also can be measured in hours worked by the employees or by the number of hours the production has run every 24-hour period. For example, a company having employees working 45 hours per week only has a weekly capacity of 45 hours. If the business is working in production, the production hours are added up in the same manner, including the unattended overnight and weekend production hours.
Displaying Budget Capacity
Because the budget capacity can be presented in several ways, there is not just one correct way to present the capacity figures in a budget or financial report. The title of the budget capacity section must indicate whether the data are presented in workforce hours or production hours. The total annual budget amount must be presented, along with the quarterly amounts available within capacity. The report must explain how well the workforce is being utilized within the available funds. This helps executives in case the budget is not reaching capacity each month in terms of production or utilizing employees.
Restructuring the Budget
If the budget does not reach capacity each month, it can affect the overall production or service development the business is offering customers. For example, the company may have customers looking to purchase specific products, but the production is taking longer than expected because the company is not operating at capacity level. If this is the case, the executives must restructure the budget so employee resources are utilized completely without affecting the quality of the production.