Well-structured Budget Classification

In every business plan, the preparation of the budget is the most important function to perform.

The planning of different organisations depends upon so many factors because of the various types of goods produced, and services rendered.

Planning is done for the purpose of comparing the actual performance with standard performance in order to correct any deviation that may arise at the end of productivity.

Therefore, budget as a financial plan that contains the list of all planned expenses and incomes prepared and approved prior to a defined period of time of the policies to pursue during the period can be classified based on time period (i.e., short-term, long-term, and medium-term budget), activity perspective (i.e., operating, financial, and master budget), quantitative perspective (i.e., surplus, deficit, and balanced budget), and functional budgets (i.e., sales, purchases, production, cash, operating expenses, opening and closing inventory, direct labour, selling and distribution, income statement, balance sheet, static/fixed, and flexible budgets).

Different Forms of Budget Classification Based on Various Factors

1. Time Perspective Budget:

(a) LONG TERM BUDGET

This is a type of budget that relates to the organisational development or its business over many years.

It is usually drawn up in any general terms that cover the nature of the business.

The duration of a long-term budget is between three and ten years, and it includes, among other things, matters like the purchase of capital assets, the issue of share capital and debentures, etc.

(b) MEDIUM TERM BUDGET

This is a type of budget formulated to relate to any financial or non-financial budgets, and it is prepared to cover the period between one and five years and has a period of thirteen months as the floor and a period of fifty-nine months as the ceiling.

(c) SHORT TERM BUDGET

This type of budget is related to current conditions and is a budget that usually covers a period of one year.

2. Activity Perspective Budget

(d) MASTER BUDGET

This is an overall financial and operating plan for a forthcoming calendar or fiscal year. It is usually prepared annually or quarterly.

It is really a number of sub-budgets tied together to summarise the planned activities of the business.

(e) FINANCIAL BUDGET

This type of budget examines the expected assets, liabilities, and stockholders’ equity of the business.

It is needed to see the company’s financial health. It is synonymous with capital expenditure in government circles.

(f) OPERATING BUDGET

This budget reflects the day-to-day activities or operations of an organisation, which deal with the costs from merchandise or services produced.

It is synonymous with recurrent expenditure in government circles.

3. Quantitative Perspective Budget

(g) SURPLUS BUDGET

This type of budget arrives at when the total estimated revenue is greater than the total estimated expenditure.

(h) DEFICIT BUDGET

This is a clear reversal of surplus; it is arrived at when more expenditure is incurred than the revenue generated.

(i) BALANCED BUDGET

This type of budget means that the total revenue generated, and the total expenditure incurred are equal. That is, there is break-even.

4. Functional Budget

(j) SALES BUDGET

This is a primary budget. It is the most important budget to prepare, and the other budgets are prepared on the basis of the sales budget.

In this budget, the in-charge or experts forecast the future expected sales of the firm.

It is prepared on the basis of product, type of consumers, salesman, locality, etc. and also shows the quantities of each product that the organisation plans to sell and the intended selling price for each product.

(k) PRODUCTION BUDGET

After the preparation of the sales budget, this is the next budget to prepare.

In this budget, the work/production manager prepares the schedule of production by breaking large production into small units (expressed in quantities only) in order to ensure that production is sufficient to meet sales demand and that economic stock levels are maintained.

(l) CASH BUDGET

This type of budget is for cash planning and control.

It presents expected cash inflow and outflow for a designated time period.

It helps the management keep cash balances in reasonable relationship to its needs and aids in avoiding idle cash and possible cash shortages.

(m) OPERATING EXPENSE BUDGET

This refers to all business running expenses that are expected to be incurred in the budget period.

The budget may be prepared either weekly, monthly, quarterly, half-yearly, or on an annual basis.

(n) BALANCE SHEET BUDGET

This is also prepared in the same format as a balance sheet.

The preparation of a budgeted balance sheet could be in a format meant for either internal or external use, depending on available information.

It gives a summary of total assets and liabilities of the organisation.

(o) STATIC (FIXED) BUDGET

This is budgeted figures at the expected capacity level.

Allowances are set forth for specific purposes with monetary limitations.

It is used when a company is relatively stable.

Stability usually refers to sales.

The problem with a static budget is that it lacks the flexibility to adjust to unpredictable changes.

(p) FLEXIBLE BUDGET

This is a budget that recognises the existence of fixed, variable, and semi-variable costs, and it is designed to change in relation to the actual level of activity of a period.

In industry, fixed budgets are appropriate for those departments whose workload does not have a direct current relationship to sales, production, or some other volume determinants related to the department’s operations.

The work of the departments is determined by management decisions rather than by sales volume.

Conclusion

In conclusion, budget classification may take different forms depending on the type of organisation, factors of production, nature of products, nature of business, organisational activities, period of carrying out business activities, quantity of goods produced and/or services rendered by an organisation, and economic, social, geographical, or political situation of an economy.

I hope you have found this write-up helpful. Feel free to share other types of budgets you know via the comment box and spend four seconds to share this article with your loved ones on social media.