Financial Budgeting for a Small Business

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The financial budget is part of a business' master budget. The master budget is part of the business' strategic plan for the near future. The strategic plan for the business maps out the firm's planned activities for the next five years.

Generally, financial budgets are planned for one year. Firms may forecast budgets further into the future if they are trying to acquire financing but generally, budgets can only be reasonably accurate for one year.

The three main elements of a financial budget are the cash budget, the budgeted balance sheet, and the capital expenditures budget.

Purpose of the Financial Budget

The financial budget helps the firm when planning and assists by controlling cash flow. The financial budget is always the last of the budgets to be prepared, before consolidating the master budget. This is because the information that is needed is presented in the operating, production, supply, and sales budgets.

Cash Budget

A cash budget is a guide for the uses of cash in an organization. It is the firm's best prediction for the amount of cash they are going to receive and use throughout the period being planned.

It accounts for the sources of cash (customers, loans, fund-raising) and the destinations of cash (materials, salaries, asset purchases).

Owners and financiers should keep in mind that budgeting is not a static process, but rather a dynamic process. During an operating period, a business will experience issues that will cause the budget to be readdressed. Labor issues, supply problems, and the weather could all affect a budget.

Many firms use annual budgets broken down into monthly cash budgets. Some find it more helpful to use weekly cash budgets. Daily cash budgets are not unheard of, but this depends on the business and industry you are in.

Budgeted Balance Sheet and Income Statement

The budgeted balance sheet is similar to the balance sheet, as it contains the same line items. The budgeted balance sheet is different in that it contains projections for the periods being planned.

The budgeted income statement is similar in this manner, as it contains projections for income statement line items for the future period.

Both the budgeted balance sheet and budgeted income statement are based on past financial statements and the analysis of those statements. These analyses should provide guidelines for owners on upcoming finances.

Capital Expenditures Budget

Capital expenditures are fixed asset expenditures, such as equipment or facilities needed to operate. These expenditures include maintenance on these items. While there are businesses that purchase larger amounts of fixed assets, most smaller businesses do not.

Small businesses tend to be more conservative in their capital expenditures since these types of purchases can be very costly. Many do not own the facilities they operate in, reducing capital expenditures.

An expenditures plan for maintenance of the equipment a smaller business owns is more likely. Consider depreciation and standard lifetimes of your equipment when designing your capital budget if this is the case.