What are the different types of budgets?
Improve your budgeting knowledge! Did you know that there are many different types of budgets? Let’s look at 4 different types of budgets you may come across in the workplace.
A capital budget is a budget that looks at an organisation’s long-term investments, capital expenditures and long-term planning. A capital budget will look at evaluating whether long term investments are worth funding or even viable by comparing future projected cash inflows and outflows. Capital budgets aim to increase equity and in turn the value of the organisation’s shares for shareholders. Major long-term investments and capital expenditure can include the purchase of fixed assets and items such as new machinery, vehicles, office space or even land.
An operational budget focusses on an organisation’s revenue and expenses for a set amount of upcoming time or a scheduled period-of-time. Generally, the operational budget is developed for the upcoming 12 months.
This budget is used to plan an organisation’s operations and plans what the organisation will be aiming to achieve in the given period-of-time. This budget can be adjusted if it is a long period and will take into account seasonal trends if it covers 12 months.
In contrast to a capital budget, an operational budget looks at short to mid-term planning rather than long term costs. An operational budget looks at daily business costs such as staff salaries, utilities and materials, against daily revenue such as sales.
A revenue budget is essentially a forecast of future revenue that an organisation will generate. This budget looks at the amount of forecasted revenue compared to forecasted expenses and calculates if the predicted revenue will be adequate for the organisation’s plans.
One of the key aspects of a revenue budget is to assess the future in order to identify any potential problems and if necessary, put in place actions to proactively avoid these problems. These actions will ensure the sustainability and growth of the organisation. For example, the expected selling price of a product or it’s volume may need to be increased in order to increase revenue.
A revenue budget is different to an operational budget as it has a long-term focus on revenue. It is also different to a capital budget as rather than focusing on in and out cash as a capital budget does it focuses on the future revenue.
Cash Flow budgets
A cash budget monitors an organisations cash flow over a specified period-of-time. The flow of cash both in and out is measured to evaluate the flow of income versus expenses leading to an organisation’s predicted cash position in the future. Cash inflows and outflows can include revenues collected from sales and operational expenses paid out.
Managing a cash budget is extremely important to organisations as it is the cash flow that determines the growth of a company’s profits. In some cases, the cash budget is also reviewed by banks and lending institutions in order to determine if an organisation is worthy of being granted a loan.
If you are a financial or non-financial professional and you want to learn more about budgets, why not consider our course in Budgeting, Forecasting and Planning. It will improve your understanding of all things linked to budgeting including the different types of budgets that exist.
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