Definition of Budgeting for Business
A company's budget document is a detailed financial statement that projects expenditures on a monthly, quarterly, or annual basis. By factoring in historical results, management insight, and upcoming internal and external events, budgets let companies compare how actual spending stacks up against predictions, thus allowing for more accurate planning moving forward.
Budgeting and Financial Forecasting
Company budgets generally comprise balance sheets, cash flow statements, and income statements. Cash flow statements, which became a required asset for publicly traded companies in 1987, contain formation governed by generally accepted accounting principles (GAAP). But even privately held companies benefit from cash flow statements, which are essential for tracking the flow of cash into and out of a business.
An income statement is a core document showing a company's profits and losses over a period of time. Profits and losses are determined by taking all revenues and subtracting from them all expenses from both operating and non-operating activities. Income statements are one of three statements used in both corporate finance and accounting. These documents display a company’s revenue, costs, gross profit, selling and administrative expenses, taxes paid, and net profits.
Although each firm adopts individual approaches, the majority of businesses focus on the following three budgeting disciplines:
- Capital budgeting
- Operating budgeting
- Cash flow budgeting
Capital budgets plan for a companies large expenses, typically highlighting the fixed assets a firm expects to invest in, including manufacturing facilities, commercial real estate, and expensive equipment. It is the process of budgeting or estimating the costs to obtain, expand, and replace fixed assets. These big ticket items are arguably the most critical to budget correctly for, because failure to afford such costs could bring company operations to a screeching halt and threaten a company's long-term longevity.
Operating budgets are formatted as income statements and chiefly contain sales forecasts. These projections take into account sales revenue, costs of goods, and operational and administrative expenses in order to calculate net profit.
Cash flow budgets show expected cash inflows (receipts or sources) and cash outflows (expenses or uses). The cash flow budget shows whether the company will have enough cash to continue meeting its monthly expenses over the budgeted time period. This is vital data, because if a cash flow budget shows a cash deficit, companies can responsibly develop borrowing plans and payback schedule in order to remain operational during difficult times.