Budgeting is the process of preparing detailed projections of future amounts. Companies often engage in two types of budgeting:
- Operational budgeting, and
- Capital budgeting
Examples of Operational Budgeting
In a business, the budgeting for operations will include preparing the following projections for the next accounting year:
- Amounts for sales
- Amounts for producing goods
- Amounts for each department’s expenses
- Summarizing the above budgets into a master budget or profit plan
- Cash receipts and disbursements for a cash budget
- Projected financial statements also referred to as pro-forma financial statements
Once prepared and approved, the budgeted amounts are used as a guide or road map in controlling the next year’s business activities.
Example of Capital Budgeting
Capital budgeting involves future projects which overlap several or many future accounting periods. Capital budgeting usually means listing each project along with its cash outlays and expected cash inflows for each year. The amounts should be discounted to their present values and also ranked by priority and profitability.
Once prepared, the capital budget provides a guide for investing in future fixed assets as well as arranging for the financing of the projects.