Question

Using the table below, describe the types of budgets. In your description, include: • The objective of the budget • How the budget assists an organization in managing its financial activities • What types of data need to be included in that specific budget.

Types of Budget Description

Cash Flow

Operating

Sales

Static

Financial

Answer 1

Type of Budget :-

1. Cash flow budget

(i) Objective of Budget :- Cash flow budget is used to track and project inflow and out flow of cash, accurate account receivables information are needed as well as any cash deficiencies noted to acquired capital investments to offset them when needed.A cash budget is an estimation of the cash flows for a business over a specific period of time.

(ii) How the budget assists an organization in managing its financial activities:- This budget is used to assess whether the entity has sufficient cash to operate and changes to the roll forward adjust the cash balances for all future months.

(iii) Types of data included in this budget:-

(a) Project your collections

(b)Add in the amount you expect to collect from your accounts receivable

(c)What other cash are you expecting to bring into your business

(d)Detail your expenses and other cash outlays

2. Operating Budget

(i) Objective of Budget :- Operating budget are a compilation of the revenue that a company anticipates to produce and expense budgets expected to determine the net income as a result. An operating budget is prepared in advance of a reporting period as a goal or plan that the business expects to achieve.

(ii) How the budget assists an organization in managing its financial activities:- Management goes through the process of compiling the budget before the start of each year, and then makes ongoing updates each month. An operating budget might consist of a high-level summary schedule, supported by detail to back up each line item in the budget.

(iii) Types of data included in this budget:-

An operating budget starts with revenue, and then shows each expense type. This includes variable costs, or the costs that vary with sales, such as the cost of raw materials and production labor. The operating budget includes fixed costs, such as the monthly rent on office space or the monthly payment for a photocopier lease.

The budget also includes operating expenses, such as interest on business loans, and the non-cash expense of depreciation. These items enable the company to compute its projected net income and net profit percentage.

3. Sales Budget :-

(i) Objective of Budget :- Sales budget is a financial plan, which shows how the resources should be allocated to achieve forecasted sales. The main purpose of sales budget is to plan for maximum utilization of resources and forecast sales.

(ii) How the budget assists an organization in managing its financial activities:-

A company always encounter questions like; How much to produce? How much revenue can be generated from sales? What about the dead stock? What all expenses to be incurred in selling the products? Sales budget answers all such questions. It is the basis for all the operational decisions taken in the organization.

(iii) Types of data included in this budget:-

(a) Decide a Period of Sales Budget

(b) Collect Previous Sales Data

(c) Gather Industry’s Sales Information

(d) Compare Sales of Consecutive Period

(e) Study Current Market Trends

4. Static Budget :-

(i) Objective of Budget :- A static budget is a type of budget that anticipates a fixed amount in sales, revenue and expenses. Static budgets can remain unchanged, or fixed, in a company's financial records regardless of fluctuations in revenue volume. It presets revenue and expenses based on projections

(ii) How the budget assists an organization in managing its financial activities:- Using a static budget can allow companies to allocate money to resources that they expect to remain the same throughout the stated period. For instance, a business may set a static budget for expenses like rent or utility payments, since these expenses are commonly the same from period to period.

A static budget can allow a company to monitor and review its sales and revenue along with its expenses. This can help the organization determine its overall financial health and performance. As a company compares its current static budget to previous periods, it can ensure it stays within its budget and track its performance against long-term goals and objectives.

(iii) Types of data included in this budget:-

Estimate your revenue. Multiply the number of units you expect to sell by your average selling price per item.

Estimate your variable costs. Variable costs are expenses directly related to the production and sale of an item.

Subtract estimated variable costs from your estimated revenue. The result is your contribution margin.

Estimate your fixed costs. Fixed costs are expenses that stay the same regardless of how much you produce and sell.

Subtract your fixed costs from the contribution margin. The result is your estimated net profit.

5. Financial Budget :-

(i) Objective of Budget :-

A financial budget in budgeting means predicting the income and expenses of the business on a long-term and short-term basis. Accurate projections of cash flow help the business achieve its targets in the right way.

Financial budget preparation includes a detailed budget balance sheet, cash flow budget, the sources of incomes and expenses of the business, etc

(ii) How the budget assists an organization in managing its financial activities:-  Organizations prepare a financial budget to manage the cash flows in a better way. This budget gives the business better control and provides a more efficient planning mechanism to manage the inflows and outflows. The financial budget provides a blueprint for the business to move forward. It addresses not only the financial aspects of the business, but also checks the operational efficiency.

(iii) Types of data included in this budget:-

• Calculate the expected inflow
• Calculate the expected outflow
• Set the targets
• Divide the expenses into different categories
• Keep track of components in the budget
• Set up the ledger