What Is Functional Budgeting?

A budget is a tool that helps identify expected income and expenses over a particular period. Budgets are used by management to control spending and manage the growth of a business. Functional budgets address spending and revenue for a particular function -- such as a department or process -- within a business. Examples of functional budgets include budgets for functions such as production, sales, business development and materials purchasing.

Application

Business functions are often identified by separating them into departments (sales, administrative, accounting, purchasing). However, functions can overlap departments and produce functional budgets that can include more than one department, such such as a production budget that includes labor, facilities and materials. Functional budgets focus on short-term expenditures within a department to accomplish a process or to complete a company initiative.

For instance, a business development budget is an example of a functional budget. Business development may include budgeting time and money from marketing, sales, administration and accounting and budgeting for processes that require help from one or more departments to accomplish, such as identifying potential markets and customers and researching competitors and solutions.

Requirements

Identifying and understanding the function being addressed is the first step to outlining a functional budget. Functions can overlap departments, highlight relationships among company branches, create long-term implications and straddle employee job descriptions. Understanding and taking advantage of the interrelationships that may occur within the company can create a functional budget that operates more efficiently.

Planning carefully and locating all the needed data before writing and implementing the budget can prevent overspending. Missing one key piece of a budget can require dipping into and shortchanging other areas of the functional budget or several departmental budgets to pay for the mistake. Double-checking budget numbers and arithmetic to prevent miscalculations is a must.

Elements

Functional budgets list both the direct and indirect costs required to complete the identified function. Direct costs are easy to identify; they include employee salaries, the cost of supplies and equipment or the cost of paying for marketing data or surveys. Indirect costs are identified as overhead or administrative costs and include the payment of taxes, utilities or security. For instance, a function that requires employees to work overtime or during weekends would need to include the indirect cost of paying utilities for non-business hours in the functional budget.

Functional budgets that address product sales, promotions or other income-generating activities will list revenue and expenses. Each type of revenue-generating activity should be listed in a functional budget for a clear picture of how the income is attained. For instance, creating a functional budget for marketing new products could include income generated by selling a product sample kit to consumers. A functional budget might include a separate line item for expected revenue generated from sample sales online, through distributors and from brick and mortar retail stores.

Master Budgets

Functional budgets provide financial information needed to create a master or summary budget of the overall expenditures of a department or company. Functional budgets are usually short-term planning tools. Combining the functional budgets into a master budget provides overall data on the expected company expenditures for a year or other designated period. Master budgets are long-term planning tools that provide management with a larger understanding of liability, assets and capital needs.

References

About the Author

Alex Burke holds a degree in environmental design and a Master of Arts in information management. She's worked as a licensed interior designer, artist, database administrator and nightclub manager. A perpetual student, Burke writes Web content on a variety of topics, including art, interior design, database design, culture, health and business.