The budgets of a company

29 December 2008 - 16:26

A budget is a tool of management conformed by a document where prognoses or forecasts of different elements from a business are quantified.

The budgets usually are related exclusively to the income or debits that a company will realize, nevertheless, we can make use of these tools to quantify prognoses or forecasts of anyone of the elements of a business, for example, we can budget the collections that we will realize, the payments of ours of debts, the products that we will make, the materials that we will require to produce these products, etc.

The budgets are fundamental tools for a business since they allow us to plan, to coordinate and to control our operations:

• planning: the budgets allow us to plan activities, to plan objectives, resources, strategies, courses to follow; anticipating themselves to the facts and, therefore, helping to reduce to the uncertainty and the changes us.
• coordination: the budgets serve as guide to coordinate activities, being allowed us to harmonize and to integrate all the sections or areas of the business, as much between these, as with the objectives of the company.
• control: the budgets serve like reference instrument and evaluation, they allow us to compare the results obtained with the budgeted ones so that, that way, for example, to know in what areas or activities exist deviations or variations (differences between obtained and the budgeted thing).

The budgetary system

For a better use of the budgets, these usually are used set, where all of them are related.

This set of budgets denominated budgetary system or masterful budget, must always begin with the budget of sales, that is the budget bases from which the others will be realized, in this budget we foretold our future sales in monetary terms.

After the budget of sales, we can continue with the budget of collections, where we will indicate the amounts to receive in the dates that correspond; then, the budget of production (in the case of an industrial or producing company) or the budget of purchases (in the case of a marketing company or services); then, the budget of requirement of raw material, the budget of payments, expenses, payment of the debt, etc.

Until culminating with the cash budget (projected flow of box), the operative budget (state gains and losses projected, or account of results projected), and the budget of the balance (projected balance).

We see next an example on the use of a budgetary system:

We suppose that we want to budget the operations of a marketing company (company dedicated to the purchase and sale of products) for the period of the four first months of the exercise, for which we considered the data from the past year and the following data or pre-selected targets:

• we project to sell 100 monthly units, that will be increased 10% every month.
• the sale price of each product is of US$20.
• 60% of the sales are cash and the balance on the credit to 30 days.
• the purchases are equivalent to the sales.
• 60% of the purchases are cash and 40% on credit to 30 days.
• the price of purchase of the product is of US$14.
• the following monthly administrative expenses are considered:
• remunerations of the personnel of the administrative area: US$50
• rent of the premises: US$20
• insurances: U$5
• cleaning and maintenance: US$10
• basic services: US$10
• office equipment: US$5


• the following expenses of monthly sales are considered:
• remunerations of the personnel of the area of sales: US$40
• commissions: US$5
• loads: US$5
• promotion and publicity: US$20


• one counts on furniture and equipment of calculation which respectively have a monthly depreciation of US$10 and US$5.
• the payment of taxes corresponds to 2% of the utility available.

In the first place we make our budget of sales:

1. Budget of sales

	January	February	March	April
Units	100	110	121	133
Sale price	20	20	20	20
TOTAL	2000	2200	2420	2662

Note: the sales begin in 100 units in January and soon they are increasing in a 10%.

2. Budget of collections (of accounts to receive)

	January	February	March	April
Counted (60%)	1200	1320	1452	1597.2
Credit (40%)		800	880	968
TOTAL	1200	2120	2332	2565.2

Note: of the done sales of US$2 000 in January, we cash received US$1 200 (60%), and US$800 (40%) the following month (credit to 30 days); the same for the other months.

3. Budget of purchases

	January	February	March	April
Units	100	110	121	133
Price of purchase	14	14	14	14
TOTAL	1400	1540	1694	1863.4

Note: every month the same amount is bought that vente (there is no final inventory).

4. Budget of payments (of accounts to pay)

	January	February	March	April
Counted (50%)	700	770	847	931.7
Credit (50%)		700	770	847
TOTAL	700	1470	1617	1778.7

Note: of the done purchases of US$1 400 in January, we cash paid US$700 (50%), and US$700 (50%) the following month (credit to 30 days); the same for the other months.

5. Budgets of Administrative Expenses

	January	February	March	April
Remunerations	50	50	50	50
Rent of the premises	20	20	20	20
Insurances	5	5	5	5
Cleaning and maintenance	10	10	10	10
Basic services	10	10	10	10
Equipment of office	5	5	5	5
TOTAL	100	100	100	100

6. Budgets of Expenses of Sales

	January	February	March	April
Remunerations	40	40	40	40
Commissions	5	5	5	5
Loads	5	5	5	5
Promotion and publicity	20	20	20	20
TOTAL	70	70	70	70

7. Depreciation

	January	February	March	April
Furniture	10	10	10	10
Calculation	5	5	5	5
TOTAL	15	15	15	15

8. Budget of cash (projected flow of box)

	January	February	March	April
INCOME
Accounts to receive	1200	2120	2332	2565
TOTAL INCOME	1200	2120	2332	2565
DEBITS
Accounts to pay	700	1470	1617	1778.7
Administrative expenses	100	100	100	100
Expenses of sales	70	70	70	70
Payment of taxes	8.3	9.5	10.82	12.27
TOTAL DEBITS	878.3	1649.5	1797.82	1960.97
BOX FLOW	321.7	470.5	534.18	604.23

9. Operative budget (account of results projected)

	January	February	March	April
Sales	2000	2200	2420	2662
Cost of sales	1400	1540	1694	1863.4
GROSS UTILITY	90	660	726	798.6
Administrative expenses	100	100	100	100
Expenses of sales	70	70	70	70
Depreciation	15	15	15	15
UTILITY BEFORE IMP.	415	475	541	613.6
Taxes (2%)	8.3	9.5	10.82	12.27
NET utility	406.70	465.50	530.18	601.33

Final notes

We like owners of the business, as guide used this budget for our planning and coordination, and, later, to evaluate if the results obtained by the company correspond to the budgeted ones so that, in case it does not happen, to take the corrective measures that are necessary.

Labels: Concepts, Finances, Tools of business, Step by step

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Related contents:

1. The cash budget
2. How to make a Earnings statement
3. How to make a Flow of Box
4. How to finance the creation of a company
5. The balance point