Why do we need a Financial Budget?

“A budget is telling your money where to go instead of wondering where it went.” – Dave Ramsey

 

Every entity prepares a master budget. This master budget includes- operating budgets, and financial budgets. As the name suggests, the financial budget looks out for the financial part of the company. It keeps a tab on the balance sheet items (assets. Liabilities and owner’s capital) along with the expenditures. 

 

Some entities prepare a financial budget yearly whilst the others may prepare it on a quarterly basis, depending upon the size of the firm. Once the budget is prepared fully, we can get to the net profits made by the end.

 

“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.” – William Feather. After preparing the budget we can allocate the resources optimally. But it does not mean that we cannot increase or decrease the amount spent. Budgets are always flexible and we can revise them if we want.

 

In this blog you will learn more about financial budget, how it is prepared, what are the different sections in a financial budget, and lastly why you should prepare a financial budget.

 

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What is a Financial budget and why is it prepared?

 

A financial budget is a budget that is prepared to work out the short-term and long-term financial needs of an entity. It helps to understand the expenditure and income of the firm. In a budgeting sense, a financial budget helps to project the cash flows of the company over a specified period.

 

These projections can be done weekly, monthly, quarterly, semi-annually or annually depending upon the need. In a financial budget we prepare a detailed report on the expenses, capital, cash-flows and investments of the firm.

 

“A budget is more than just a series of numbers on a page; it is an embodiment of our values.” – Barack Obama 

 

Why do we need to prepare a financial budget? A financial budget is a very strong tool that helps the entity to attain its short term and long term objectives. The stakeholders have to be updated regularly on the financial position of the company, so they can make decisions. 

 

With the help of a budget companies can manage their cash effectively. It gives a control mechanism to the firms. Businesses can strive for better control, planning, and implementation of the cash flows with budgets.

 

Both operating budget and financial budgets are interdependent. With the help of the operating budget we can analyse the sales and purchase figures. And then with the help of a financial budget we can develop plans on managing the operations using cash effectively. 

 

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Sections of a Financial Budget

 

No firm can function without cash. Therefore, it is necessary to prepare a financial budget. There are three different sections in a financial budget which are given below.

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Different sections of a Financial Budget

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1. Capital Expenditure Budget

 

It is one of the budgets prepared under the Financial Budget framework. Capital expenditure budget deals with the expenditure on fixed assets. Fixed assets are needed to function. This budget helps to maintain the fixed assets of the firm. 

 

Some purchase more fixed assets while others don't. It depends on the cash and investment basis. Small businesses are more careful while making big investments or fixed asset purchases. They are more conservative and often rely on lease or hire.

 

2. Cash Budget

 

Cash budget is also prepared under the Financial Budget framework. It is an internal budget and prepared for a short term. We know that without cash businesses cannot operate. Thus maintaining cash balances throughout the period is necessary. 

 

Controlling the receipts and payments, avoiding unnecessary petty expenses, looking for working capital needs can be done through cash budgets. 

 

If there is an increase in WC then the entity can use it to manage extra operating expenses. If there is a decrease in WC then entities can try to reduce the expenses or increase cash availability.

 

3. Balanced Balance sheet

 

Both capital expenditure budget and cash budget needs to be prepared before making the balanced balance sheet budget. It begins with the opening balances and then uses the data in both the above budgets. 

 

All the details about the sales, production, raw materials, closing inventory, COGS is prepared. In fact if we look closely, all the items in a cost sheet are looked into.

 

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How to prepare a financial budget?
 

If you are a small entity then preparing a financial budget is not a very tedious task for you. You don’t have to prepare spreadsheets or files. You can simply use ready-made templates and fill in the details. 

 

Small shops, vendors and even retailers prepare a financial budget. The difference is that they don’t have to put in a lot of work like corporations and big companies. Here are some basic steps that you can also follow to prepare your own financial budget to track your finances.

 

1. Calculate the net income that you earn. If you are a student and working part-time. The stipend you get from the work is also your income.

2. Look for your spending. Track the expenditure. You can make a list of expenses that are fixed and that are variable.

3. Define your goal. Analyse your expenses and predict the future expenditure based on it.

4. Then make a plan. Decide your future course of action based on the expenditure. You can even plan to save some money by cutting off excess expenses in the future.

5. Adjust based on the plans that you make.

6. Keep tracking your performance and take measures to control your spending.

 

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These are some steps that even students can take to make their budgets. For big companies they need to hire accountants and experts to calculate everything. A budget helps us to make sure that we have plenty of resources to use. As quoted by Joe Biden - “Don't tell me what you value, show me your budget, and I'll tell you what you value.”