Five of the Different Types of Budgets

Five of the Different Types of Budgets
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A budget is a plan that forecasts future expenses and helps companies to effectively allocate resources to meet those expenses. Firms prepare budgets to plan how they will allocate funds for the next budget year. Budgets are also used to evaluate performance and compare actual spending with budgeted amounts. There are many different types of budgets, and each type serves a different purpose.

Capital Budgets

A capital budget estimates all capital asset acquisitions and summarizes all expenses and costs of major purchases for the next year. Capital assets include items that have useful lives of more than 12 months, such as buildings, building improvements, land, furniture, fixtures, equipment, computers, musical instruments, works of art and books, writes David C. Maddox, the author of the book “Budgeting for Not-for-Profit Organizations.” The main purpose of a capital budget is to forecast costs of major capital purchases.

Operating Budgets

Operating budgets indicate the products and services a firm expects to use in a budget period. It describes all the income-generating activities of a firm, including production, sales and inventories of finished goods. An operating budget typically has two distinct parts: the expense budget and the revenue budget. The expense budget indicates all expected expenses of a firm for the coming year, while the revenue budget shows all projected revenues for the coming year.

Cash Budgets

A cash budget projects all cash inflows and outflows for the next year. Cash budgets have four distinct elements: cash disbursements, cash receipts, net change in cash and new financing, writes Arthur J. Keown in the book, “Foundations of Finance.” A cash budget is important, because it allows administrators to timely identify periods with cash overages and shortages so they can take necessary remedial action.

Sales Budgets

Sales budgets indicate the sales a firm expects to make in units and dollars for a budget year. They detail the quantities of products or services a firm expects to sell, revenues incurred from those sales and all expenses accrued during selling. A sales budget is a planning instrument and a control mechanism, writes Kujnish Vashisht in his book, “A Practical Approach to Sales Management.”

Sales budget forecasts determine sales potential, or the maximum number of sales a firm can make. This information is then used to plan resource allocations to achieve those sales levels. Sales budgets serve as benchmarks or yardsticks against which actual sales performance is measured and variables such as sales volume, profitability and selling expenses are controlled.

Personnel Budgets

Personnel budgets, or salary and wage budgets, are cost estimations related to labor. They forecast the costs of recruitment, hiring, training, assignment, salaries, overtime costs, additional benefits and discharge. Calculating personnel budgets includes estimating the number of staff, staffing ratios and overheads, write George M. Guess and Paul G. Farnham, the authors of the book, “Cases in Public Policy Analysis.”