Budgeting

Budgeting is the process of creating a plan to spend your

money. This spending plan is called a budget. Creating this
spending plan allows you to determine in advance whether you
will have enough money to do the things you need to do or
would like to do. Budgeting is simply balancing your expenses
with your income
BUDGETING
o The process of creating a plan to spend your money
o This spending plan is called a BUDGET.
o This allows to determine in advance whether one will have
enough money to do the things need to do or would like to do.
IMPORTANCE OF BUDGETING
o It ensures that one will always have enough money for the
things one need and the things that are important
o It will keep one out of debt or help one work
 TYPES OF BUDGETS FOR BUSINESSES
1. Master Budget – aggregate of a company’s individual budgets
designed to present a complete picture of its financial activity and
health

2. Operating budget – a forecast and analysis of projected income

and expenses over the course of a specified time period.
3. Cash Flow budget – it is a means of projecting how and when
cash comes in and flows out of a business within a specified time
period.
4. Schedule of Expected Cash Collections – shows the budgeted
cash allocations on sales during a period.

5. Sales budget – the first and basic component of master budget

and it shows the expected number of sales units of a period and
the expected price per unit
6. Production budget – schedule showing planned production in units
which must be made by a manufacturer during a specific period to
meet the expected demand for sales and the planned finished goods
inventory.
•Planned Production in Units = Expected Sales in Units +
Planned Ending
•Inventory in Units – Beginning Inventory in Units

7. Budgeted Income Statement Definition - contains all of the line

items found in a normal income statement except that it is a projection
of what the income statement will look like during future budget
periods

8. Projected Balance Sheet – communicates expected changes in

future asset investments, outstanding liabilities and equity financing
 Financial projections are an important business planning
tool for several reasons.
 If you’re starting a business, financial projections help
you plan your startup budget, assess when you can
expect the business to become profitable, and set
benchmarks for achieving financial goals.
 If you’re already in business, creating financial
projections each year can help you set goals and stay on
track.

 When seeking outside financing, both startups and

existing businesses will need financial projections to
convince lenders and investors of the business’s
growth potential.
• Projected financial statements incorporate current
trends and expectations to arrive at a financial
picture that management believes it can attain as of
a future date. At a minimum, projected financial
statements will show a summary-level income
statement and balance sheet. This information is
typically derived from
a revenue trend line, as well as expense percentages
that are based on the current proportions of
expenses to revenues. A better set of projected
financial statements will incorporate the following
features:
• A statement of cash flows
• Expense projections that include step costs for major points
at which revenues increase or decline
• Consideration of the pace at which the business can
reasonably grow, based on its prior history
• Consideration of the corporate bottleneck operation on the
ability to grow
• The ability of the business to attract the funding needed in
order to accomplish the financial results stated in the plan
• A projected income statement shows profits and losses for a
specific future period – the next quarter or the next fiscal year,
for instance. It uses the same format as a regular income
statement, but guesstimating the future rather than crunching
numbers from the past. It's also known as a budgeted income
statement.
• The financial statement prepared first is your income
statement. As you know by now, the income statement breaks
down all of your company's revenues and expenses. You need
your income statement first because it gives you the necessary
information to generate other financial statements.
 Financial projections pull together several different
financial documents, including:
 Startup expenses
 Payroll costs
 Sales forecast
 Operating expenses for the first 3 years in business
 Cash flow statements for the first 3 years in
business
 Income statements for the first 3 years in business
 Balance sheet
 Break-even analysis
 Financial ratios
 Cost of goods sold (COGS), and
 Amortization and depreciation for your business.