A business creates a budget because it is a powerful tool for a business to the comparison of actual future performance to an ideal scenario that incorporates its best estimation of sales, expenditure, assets replacement, cash flow, and other factors. A budget gives an estimation and an overall rough idea of business activities that help to implementation of goals. There are several budget models available. We will discuss in detail all the budget models.
The static budget refers to the budget that anticipates a fixed amount of sales, revenue, and expenses. Statics budget is fixed budget and remains unchanged when fluctuation in revenue volume. A static budget is made for a particular period and it is used by the government. A static budget is made for fixed expenses and the expenses that are the same for some time like rent and utility payments.
A zero-based budget is a method of the budget that determines what outcome management wants and develops a package of expenditures that will support each outcome. It prepares according to the need of the business and cost. A zero-based budget does not depend on the previous data and it is possible to the budget can be higher or lower than the previous budget. Mostly Zero-based budgets are used by small businesses.
An increment budget is a process of updating a budget model. It is prepared by taking into consideration the current period budget or actual performance-based but an incremental amount will be added in the new budget period. In simple words we can say it is the process of simplified budget updates, it does not emphasize the detailed examination of company efficiency and expenditure.
A rolling budget refers to the extension of the budget by continually updating to add a new budget period as the most recent budget period is completed. It involves the incremental extension of the existing budget model. Business always adopts a rolling budget that extends from one year to the next year with incremental amounts.
The master budget is an aggregation of all lower-level budgets prepared by the business for several functional areas. This budget is a summary of the functional budget and provides a compressive picture of all functional activities for the business. the master budget includes cost material, labor, sales, production, operating expenses, profits, appropriation of profits, major financial ratios, and many more. Mostly this approach of the budget is adopted for specific goals, and management is required to take action to achieve a prepared budget. Managers can also do require changes in the budget for the completion of the goal. This budget works as not only an instruction tool for employees but also for judging the performance in every activity.
The operational budget covers all revenue and expenditure of day to day core business of the company. Revenue represents the sales of products and earnings of services; expenditure covers the cost of production and administrative expenses that include direct and indirect costs also. The operating budget usually broken down into the period of reporting such as it can be weekly or monthly. Manger mostly compares actual outcome to budget throughout the year, planning and adjusting for variations in revenue.
Cash flow budget
A cash flow budget examines the inflows and outflows in a business. It predicts a company’s ability to take in more money than it pays out. The cash flow budget also provides suggestions regarding production cycles and inventory levels so that company’s resources are available for activity. Businesses keep their eye on cash flow budgets to pinpoint shortfalls between expenses and consider sales when the financial may be needed to cover overhead.
This type of budget is mostly used by the organization and ministries' involvement in the development activities. This process of budgeting takes into consideration in comparison between the result and the performance of the development program. Resulting of the performance budget is ensuring cost-effective and effective planning. Performance budget faces development challenges and awareness regarding the uses of tax payer’s money, business need to be aware of the new method of the budget that will help to emerge transparent and accountable methods.
Every enterprise, however big and small, has to incur huge expenditures for the establishment of the production unit. Capital expenditure is essential for the installation of plant and equipment and other fixed assets for supporting production. This expenditure is known as capital expenditure, it can incur before and after the production begins. The amount of expenditure is depending on the business to business.
It includes the estimation costs of indirect material, indirect labor, and indirect expenses needed for the budget period for making a budget for targeted production. In simple words, the estimation of factory overheads, distribution overhead, and administrative overheads are known as the overhead budget. The capital budget contains predictions regarding capital investment likewise the overhead budget contains predictions regarding all indirect expenses required for business goals. The manufacturing overhead falls into three categories fixed, variable, and semi-variable. This will help in transparency in the business expenses.
This type of budget is not required for every business. it is required for that kind of business where the need for manpower is very huge in number such as construction business. It shows labor requirements in terms of hourly-based labor, cost, and grade of workers. It facilitates the personnel managers to provide information regarding the requirement of the worker to the department either by the transferor by new appointments.