Period of time to prepare budgets

The budget period is the period of time for which a budget is prepared and used.  A detailed budget for each responsibility centre in normally prepared for one year, although this can depend upon the type of budget, the type of business and the circumstances surrounding the business, with many budgets  spanning one year or less.

The annual budget is often broken into months for the first quarter and by quarters for the rest of the year.  The quarterly budgets are then divided into months as the year progresses. The budgeted data for a year are frequently revised as the year unfolds, for example at the end of the first quarter the budget for the next three quarters is changed in the light of new information.

The following are typical budgeting periods:

Operating Budget -

One year – This plans the day to day use of resources and creation of utilities.  It is particularly concerned, with materials, labour, overhead resources, sales and cash.

Sales Budget -

this shows the quantities of each product that the company plans to sell and the intended selling price. It is usually prepared yearly and supported by detailed subsidiary sales budgets where sales are analysed by areas of responsibility such as territories and into monthly periods by product types.

Profit Budget -

this budget plans the resources (excluding cash) to be used and the utilities to be created and sold during the budget period.  Planned prices are then placed on the resources and utilities to convert to costs and income from which a budgeted profit can be found.

Cashflow Forecast /Cash Budget -

this budget plans the receipts and payments.  The majority of the required figures can be abstracted from the profit budget but some important figures are also taken from the capital budget.  The prime function of the cash budget is to show the budgeted cash balances at various points of time throughout the budget period and to ensure that sufficient cash is available at all times to meet the level of operations that are outlined in the various budgets.  Usually monthly or weekly budgets will be necessary. It also predicts future events early enough for corrective action. However, if  applying for a loan, it may be necessary to create a cash flow budget that extends for several years into the future, as part of the application process.

Budgeted Balance Sheet -

This budget plans the balance sheet for the end of the budget period.  It embodies the budgeted profit from the profit budget, the budgeted cash balance from the cash budget and the planned changes in the other asset and liability values, particularly those related to working capital.

In addition to those operating budgets there are 2 adhoc budgets prepared on an ad hoc basis for a selected period of time:

Working Capital Budget -

This is usually prepared in respect of a project and plans the working capital requirements of that project.

Capital Budget -

many years – This plans the capital structure and liquidity of the business over a long period of time.  Its main concern is therefore with equity, liabilities, fixed and current assets, especially the year end cash balances.  A major sub-budget of the capital budget is the capital expenditure budget which plans the capital expenditure, especially on  new plant and facilities.

Plant, Equipment and Product Changes -

A long term budget usually 5 years or more.

Production Budgets -

These are expressed in quantities only and should be prepared on a monthly basis indicating the total production for each department.

Direct Usage Budget -

The relevant departments involved in the manufacturing will estimate their usage budget on an annual basis.