1. Budgets are usually set by how previous money was spent and expected income.

The budgets often dictate how much is spent toward payroll, supplies and advertising
expenses. ... While a plan or forecast can be wrong, an error-ridden budget invites
financial disaster
2. Budgets are business estimates for future period, budgeting is the process of preparing
these estimates.
A budget is an outline of expectations for what a company wants to achieve for a
particular period, usually one year. Characteristics of budgeting include: Estimates of
revenues and expenses. ... A budget is compared to actual results to calculate the
variances between the two figures.
3. A budget cycle is the life of a budget from creation or preparation, to evaluation. Most
small businesses don't use the term “budget cycle” but they use the process and go
through each of its four phases — preparation, approval, execution and evaluation.
4. The budget cycle is the process in which companies and governments create, evaluate
and approve budgets.

Using Budget Cycles

The budget cycle is common to government agencies that are required to use transparent
budgeting processes, but the concept is easily adapted to the needs of businesses. The budget
cycle promotes due diligence and accountability because research, past performance and
financial projections feed the process. Decisions are also documented at each stage.

The clearly defined segments of the budget cycle encourage a careful process that allows for
input and revision as you work to build the budget that works best for your business. The
budget cycle usually begins in advance of the company’s accounting period and ends well after
that period ends.

Preparation and Submission

During the preparation and submission segment of the budget cycle, the business considers the
numbers and makes decisions. Your business might have several departments that submit
projections for their budgetary needs, or your budget might be a simple document that requires
little input from others.
 The completed budget is submitted to the individuals who need to review, make
recommendations and approve it. This might occur between you and an accountant. The budget
might move back and forth between preparation and submission until all parties accept the
document.

Approval and Execution

The formality of the approval segment depends on the size of your business, but approval of
the budget makes it official. The budget cycle in public finance requires elected officials and
high-level managers to approve government budgets. But a sole proprietorship only needs the
owner’s approval. Meanwhile, budget approval for a larger business is the responsibility of
boards, committees or authorized executives.

While an individual owner might make changes at will, a business with more employees likely
will require adherence to the budget unless changes are authorized. The execution segment
begins at the start of the company’s accounting period, such as the fiscal or calendar year.
Monitoring and control of financial activity occurs during execution. Adjustments are made as
needed as the budget is implemented.

Audit and Evaluation

The audit and evaluation segments occur after the accounting period ends. An internal or
external audit examines the financial activities during the accounting period, assesses
compliance with the budget and measures the accuracy of projections used to create the
budget. The evaluation provides a final report on the budget and the audit and makes
recommendations for the next budget cycle and budget.

 budget is “a plan quantified in monetary terms prepared and approved before a defined time
usually showing planned income to be generated and or expenditure to be incurred during that
period and the capital to be employed to attain a given objective.”

The analysis of the above definition shows the following elements in the budget:

1. It is a plan expressed in financial-terms for attaining some objective.

2. It is prepared and approved before a defined time.

3. It shows the planned income to be generated.

4. It shows probable expenditure to be incurred.

5. It indicates the capital to be employed during the period.

Classification of Budget

Budgets classified according to 4 bases;

1. Based on Time;

2. Based on Condition;

3. Based on Functions; and,

4. Based on Flexibility.

Types of Budget Based on Time

Based on time factor budgets can be classified into two types;

1. Long-term Budget, and

2. Short-term Budget.

Long-term Budget

This budget is related to the planning operations of an organization for a period of 5 to 10 years.
The long-term budget may be adversely affected due to unpredictable factors. Therefore, from a
control point of view, the long-term budget should be supplemented by short-term budgets.

Example: Research and Development Budget, Capital Expenditure Budget, etc.

Short-term Budget
 This budget is drawn usually for one year. Sometimes a budget may be prepared for a shorter
period (like monthly budget, quarterly budget, etc.). Shortterm budgets are prepared in detail and
these budgets help to exercise control over day-to-day operations.

Example: Material Consumption Budget, Labor Utilization Budget, Cash Budget, etc.

Types of Budget Based on Condition

Based on conditions prevailing, a budget can be classified into 2 types;

1. Basic Budget, and

2. Current Budget.

Basic Budget

A budget that is established for use as unaltered over a long period is called Basic Budget.

This budget does not take into consideration changes occurring from the external environment
which are beyond the control of management. This budget is more useful for top-level
management for formulating policies.

Current Budget

A budget that is established for use over a short period and is related to the current conditions is
called the Current Budget. This budget is adjusted to the current conditions prevailing in the
business.

Types of Budget Based on Functions

Based on activities or functions of a business, budgets can be classified into 2 types

1. Master Budget, and

2. Functional Budgets.
Master Budget

The final integration of all functional budgets by the Budget Officer provides the Master Budget.
When functional budgets have been completed, the Budget Officer prepares the Master Budget.

Master Budget is the summary budget incorporating its component functional budgets, which is
finally approved, adopted and employed. [C. I. M. A. (London)l.

Master Budget shows the operating profit of the business for the budget period and budgeted
balance sheet at its close. This Budget portrays the overall plan for the budget period.

The master budget consists of several separate but interdependent budgets. The first step in the
budgeting process is the preparation of the sales budget, which is a detailed schedule showing the
expected sales for the budget period. An accurate sales budget is the key to the entire budgeting
process.

If the sales budget is inaccurate, the rest of the budget will be inaccurate. The sales budget is
based on the company’s sales forecast, which may require the use of sophisticated mathematical
models and statistical tools.

We will not go into the details of how sales forecasts are made. This is a subject that is most
appropriately covered in marketing courses.

The sales budget helps determine how many units need to be produced.

Thus, the production budget is prepared after the sales budget. The production budget, in turn, is
used to determine the budgets for manufacturing costs including the direct materials budget, the
direct labor budget, and the manufacturing overhead budget.

These budgets are then combined with data from the sales budget and the selling and
administrative expense budget to determine the cash budget.
 A cash budget is a detailed plan showing how cash resources will be acquired and used. After the
cash budget is prepared, the budgeted income statement and then the budgeted balance sheet can
be prepared.

Functional Budgets

Functional Budgets relate to functions of the business such as product sales etc. In other words,
Functional Budgets are prepared in respect of various functions performed in a business.

Functional Budgets which are commonly found in a business concern are as follows;

1. Sales Budget;

2. Production Budget;

3. Material Budget;

4. Labor Budget;

5. Production Overhead Budget;

6. Administration Overhead Budget;

7. Selling & Distribution Overhead Budget;

8. Plant Utilization Budget;

9. Cash Budget

10. Research & Development Budget and more.

Types of Budget based on Flexibility

Based on flexibility budgets can be classified into two types;

1. Fixed Budget, and

2. Flexible Budget.

Fixed Budget (or Static Budget)

Fixed Budget is a budget which is designed to remain unchanged irrespective of the level of
activity attained. This type of budget is most suited for Fixed expenses, which have no relation to
the volume of output. Fixed -Budget is ineffective as a tool for cost control. Fixed Budget is
based on the assumption that the volume of output and sales can be anticipated with a fair degree
of accuracy.

Flexible Budget (or Sliding Scale Budget)

Flexible Budget is a budget which is designed to change by the level of activity attained.

This budget recognizes the difference in behavior between fixed and variable costs about
fluctuations in output. This budget serves as a useful tool for controlling costs. It is more
realistic, practical and useful than Fixed Budget.

A flexible budget that can be used to estimate what costs should be for any level of activity
within a specified range. A flexible budget shows what costs should be for various levels of
activity.

The flexible budget amount for a specific level of activity is determined differently depending on
whether a cost is variable or fixed.

If a cost is variable, the flexible budget amount is computed by multiplying the cost per unit of
activity by the level of activity specified for the flexible budget. If a cost is fixed, the original
total budgeted fixed cost is used as the flexible budget amount.

Characteristics of a Flexible Budget

Flexible budgets take into account how changes in activity affect costs. A flexible budget makes
it easy to estimate what costs should be for any level of activity within a specified range.
 When a flexible budget is used in performance evaluation, actual costs are compared to what the
costs should have been for the actual level of activity during the period rather than to the
budgeted costs from the original budget.

This is a very important distinction— particularly for variable costs. If adjustments for the level
of activity are not made, it is very difficult to interpret discrepancies between budgeted and
actual costs.

5. A personal business plan, sometimes called a personal development plan, is guided by

the same principles as a corporate business plan. You write a personal business plan to
review your personal goals relating to your career, family and financial development
A business plan is used to initially start a business, obtain funding, or direct
operations. ... Whereas a business plan is used to provide a structure for ideas in order to
initially define the business
6. The operating budget consists of a budgeted or forecasted income statements, which
are supported by a number of schedules:

 Sales Budget. ...

 Production Budget. ...

 Direct Materials Purchases Budget. ...

 Direct Labor Budget. ...

 Overhead Budget. ...

 Ending Finished Goods Inventory Budget. ...

 Cost of Goods Sold Budget.