What is a financial budget?
The financial budget is an extremely important planning tool that describes the economic and financial resources necessary for the development or execution of the company's activities or processes over the long term. A realistic budget allows the company to effectively manage the available resources, develop a strategic plan and thus ensure its survival and future growth.
To prepare a financial budget, you must have certain financial knowledge, which can be acquired through the Finance master that at EIA University we have for you.
Financial budget target
The main objective of the financial budget is to ensure the growth of the company, it also helps in making decisions related to contracts, purchases, assets, loans, among others. In addition, the financial budget allows you to analyze the cash flow available to the company to find out if the expenses can be covered and finance new projects, it also helps to avoid possible capital losses, especially in cases where the company's income is lower than the normal.
Features of a financial statement
The main characteristics of a financial budget are:
- The duration, generally budgets are created with an estimated duration of 1 year.
- Budgeting intends to have control of the company's budget and achieve the objectives throughout the year.
- The department responsible for budgets is administration, finance or accounting.
- The type of budget is short-term, private, flexible and follows an estimation methodology.
Types of financial budgets
There are different types of financial budgets, each of which allows you to define different plans and strategies depending on the company, which are:
- Operating budget: This type of budget covers the operating activities of the company. That is, administration, production or sales activities and are generally created in large organizations that need to keep track of the complexity of the operation.
- Capital Balance: Capital budget processing helps to make a financial forecast, to know the difference between future investments and the resources needed to carry it out.
- Main budget: is the principal of an enterprise. It is the point of reference because it covers all sectors and generates a general projection of the company.
- Production balance: It is one of the main basis to know the amount of inputs and resources that will be used in a given period to generate profits for the company.
- Treasury Budget: It is a financial tool that allows you to plan and control the company's cash flows and payments.
- Cash Flow Balance: Known as a cash budget, it is what informs the company of how much cash it has in a given period of time.
Steps to prepare a financial budget
It is important to know what are the main steps that must be followed to carry out the preparation of a financial budget:
The first step is always to calculate the operating budget, which is where the activities that generate income for the company are described. This will allow the company to forecast other factors such as sales or manufacturing expenses.
The company must take into account a series of elements that will allow it to correctly calculate the financial budget:
- Profit forecast: for its preparation it is necessary to look back and review the history of the profits that the company has had.
- Expense forecast: It is important for the company to calculate how much it needs to spend in order to develop its business normally.
- Strategic plan: for the budget to be effective and realistic, it is necessary to know what the company's goals are in the medium and long term.
- Budget by departments: each area must specify its own specific expenses in infrastructure, production, personnel.
- Expenses, if any: Refers to those expenses that the company did not have previously. It's important to give them a game within the company's annual budget.
Importance of the financial budget
In addition to reporting financial health and ensuring business growth, the financial budget is important for:
- It allows the company to know the capital it needs to achieve the proposed objectives.
- It helps in making important decisions, especially those related to investments, contracts, purchases of equipment, fixed assets, loans.
- It is ideal for analyzing the cash flow available to the company. With this, it can be determined whether it is possible to cover administrative costs and/or finance new ideas.
- Avoid possible capital losses, especially in cases where the company's income is lower than normal.
- Prepare the company to face possible unexpected events.
If you want to know other articles similar to What is a financial budget? you can visit the category MBA.