Functional budgets are a type of budget that focus on specific functional areas of a business, such as sales, production, marketing, and finance. These budgets help a business plan and allocate resources to achieve its strategic objectives. One of the key functional budgets is the cash budget, which is a financial plan that outlines the cash inflows and outflows of a business over a specific period of time.
The cash budget is a critical tool for managing a business’s cash flow, as it helps to ensure that there is enough cash on hand to cover expenses and investments. The cash budget takes into account various factors, such as sales revenue, production costs, overhead expenses, capital expenditures, and financing activities.
The cash budget helps a business to plan and monitor its cash flow, which is essential for managing day-to-day operations and making strategic decisions. By having a clear understanding of its cash inflows and outflows, a business can ensure that it has enough cash on hand to cover its expenses and investments, and avoid cash shortages or cash flow problems.
Components of a cash budget:
- Cash inflows: This includes all the cash that a business expects to receive during the budget period, such as sales revenue, accounts receivable collections, and any other sources of cash.
- Cash outflows: This includes all the cash that a business expects to pay out during the budget period, such as payroll expenses, rent, utilities, and other overhead costs.
- Capital expenditures: This includes any investments in fixed assets, such as equipment or property.
- Financing activities: This includes any borrowing or financing activities, such as bank loans or lines of credit.
- Beginning cash balance: This is the amount of cash that a business has on hand at the beginning of the budget period.
- Ending cash balance: This is the amount of cash that a business expects to have at the end of the budget period, after taking into account all the cash inflows and outflows.
Types of functional budgets:
Sales budget
The sales budget is a functional budget that estimates the expected sales revenue for the upcoming budget period. It considers the current sales trends, market conditions, and the company’s historical sales data to forecast sales revenue. This budget helps the company to plan its marketing and production activities based on anticipated sales volume.
Sample:
| Product | Unit Sales Price | Expected Unit Sales | Total Sales Revenue |
| A | $50 | 1,000 | $50,000 |
| B | $100 | 500 | $50,000 |
| C | $75 | 750 | $56,250 |
| D | $25 | 2,000 | $50,000 |
| E | $150 | 250 | $37,500 |
| Total | – | 4,500 | $243,750 |
The sales budget table lists five different products and their unit sales prices. The expected unit sales for each product are estimated based on the company’s sales forecasts and market analysis. The total sales revenue is calculated by multiplying the unit sales price by the expected unit sales for each product and adding up the results.
The total expected unit sales for all products in the budget period are 4,500 units, and the total sales revenue is $243,750. The sales budget table helps the company to plan its production, marketing, and inventory management activities based on the expected sales volume. It also provides a basis for measuring the actual sales performance during the budget period and making adjustments as needed.
Production budget
The production budget is a functional budget that estimates the level of production required to meet the expected sales volume. It takes into account the available resources, such as labor, materials, and equipment, and the production capacity of the company. This budget helps the company to plan its production schedule and manage its inventory levels.
| Product | Expected Sales Volume | Required Ending Inventory | Total Units Needed | Beginning Inventory | Total Units Required |
| A | 1,000 | 200 | 1,200 | 100 | 1,100 |
| B | 500 | 100 | 600 | 50 | 550 |
| C | 750 | 150 | 900 | 75 | 825 |
| D | 2,000 | 400 | 2,400 | 200 | 2,200 |
| E | 250 | 50 | 300 | 25 | 275 |
| Total | 4,500 | 900 | 5,500 | 450 | 5,050 |
The production budget table lists five different products and their expected sales volume for the budget period. The required ending inventory is estimated based on the company’s inventory policy, and the total units needed is calculated by adding the expected sales volume and required ending inventory. The beginning inventory is the remaining inventory from the previous period, and the total units required is calculated by adding the total units needed and beginning inventory.
The total units required for all products in the budget period are 5,050 units. The production budget table helps the company to plan its production schedule and manage its inventory levels to meet the expected sales volume. It also provides a basis for measuring the actual production performance during the budget period and making adjustments as needed.
Purchases budget
The purchases budget is a functional budget that estimates the amount of raw materials and supplies needed to support the production schedule. It considers the production requirements, inventory levels, and lead times to determine the timing and quantity of purchases. This budget helps the company to manage its cash flow and ensure that it has sufficient inventory to meet the production needs.
| Product | Expected Sales Volume | Required Ending Inventory | Total Units Needed | Beginning Inventory | Total Units Required | Unit Cost | Total Cost |
| A | 1,000 | 200 | 1,200 | 100 | 1,100 | $20 | $22,000 |
| B | 500 | 100 | 600 | 50 | 550 | $30 | $16,500 |
| C | 750 | 150 | 900 | 75 | 825 | $25 | $20,625 |
| D | 2,000 | 400 | 2,400 | 200 | 2,200 | $10 | $22,000 |
| E | 250 | 50 | 300 | 25 | 275 | $50 | $13,750 |
| Total | 4,500 | 900 | 5,500 | 450 | 5,050 | – | $95,875 |
The purchases budget table lists five different products and their expected sales volume for the budget period. The required ending inventory is estimated based on the company’s inventory policy, and the total units needed is calculated by adding the expected sales volume and required ending inventory. The beginning inventory is the remaining inventory from the previous period, and the total units required is calculated by adding the total units needed and beginning inventory.
The unit cost is the estimated cost per unit of each product, and the total cost is calculated by multiplying the unit cost by the total units required for each product. The total cost for all products in the budget period is $95,875.
The purchases budget table helps the company to plan its purchases of raw materials and finished goods to meet the expected sales volume and manage its inventory levels. It also provides a basis for measuring the actual purchasing performance during the budget period and making adjustments as needed.
Marketing budget
The marketing budget is a functional budget that outlines the planned marketing activities for the upcoming budget period. It includes advertising, promotions, and other marketing initiatives aimed at reaching the target audience. This budget helps the company to plan its marketing strategy and allocate resources to achieve its marketing goals.
| Item | Cost per Unit | Quantity | Total Cost |
| Trade Show | $5,000 | 2 | $10,000 |
| Online Ads | $1,000 | 4 | $4,000 |
| Printed Flyers | $0.25 | 10,000 | $2,500 |
| Social Media | $2,000 | 1 | $2,000 |
| Sponsorship | $7,500 | 1 | $7,500 |
| Total | – | – | $26,000 |
The marketing budget table lists five different marketing activities and their associated costs. The cost per unit is the estimated cost of each marketing activity, and the quantity is the number of times the activity will be implemented during the budget period. The total cost is calculated by multiplying the cost per unit by the quantity for each activity.
The total marketing budget for the budget period is $26,000. This budget provides a basis for the company to plan and implement its marketing activities to reach its target audience and achieve its sales objectives. It also provides a basis for measuring the actual marketing performance during the budget period and making adjustments as needed.
Research and development (R&D) budget
The R&D budget is a functional budget that allocates resources for the development of new products or services. It includes the costs associated with research, design, and testing of new products or services. This budget helps the company to invest in innovation and stay ahead of the competition.
| Item | Cost per Unit | Quantity | Total Cost |
| Salaries and Benefits | – | – | $500,000 |
| Equipment and Supplies | – | – | $250,000 |
| Contracted Research Services | $50,000 | 2 | $100,000 |
| Travel and Training Expenses | $5,000 | 5 | $25,000 |
| Total | – | – | $875,000 |
The R&D budget table lists four different R&D activities and their associated costs. The salaries and benefits category includes the cost of hiring and retaining R&D personnel, such as researchers and scientists. The equipment and supplies category includes the cost of purchasing and maintaining R&D equipment and supplies, such as lab equipment and materials. The contracted research services category includes the cost of outsourcing R&D activities to external research firms. The travel and training expenses category includes the cost of attending conferences, seminars, and other training events related to R&D activities.
The total R&D budget for the budget period is $875,000. This budget provides a basis for the company to plan and implement its R&D activities to develop new products or improve existing products. It also provides a basis for measuring the actual R&D performance during the budget period and making adjustments as needed.
Capital expenditures budget
The capital expenditures budget is a functional budget that outlines the planned investments in fixed assets, such as equipment, buildings, or land. It considers the company’s long-term strategic objectives and the need for new or upgraded assets. This budget helps the company to plan and manage its capital expenditures and ensure that it has the resources to invest in the necessary assets.
| Item | Cost per Unit (in Rs.) | Quantity | Total Cost (in Rs.) |
| Machinery | 1,000,000 | 2 | 2,000,000 |
| Vehicles | 500,000 | 3 | 1,500,000 |
| Furniture and Fixtures | 200,000 | 5 | 1,000,000 |
| Computer Equipment | 300,000 | 4 | 1,200,000 |
| Total | – | – | 5,700,000 |
The capital expenditures budget table lists four different types of capital assets and their associated costs in rupees. The cost per unit is the estimated cost of each asset, and the quantity is the number of units that will be purchased during the budget period. The total cost is calculated by multiplying the cost per unit by the quantity for each asset.
The total capital expenditures budget for the budget period is 5,700,000 rupees. This budget provides a basis for the company to plan and implement its capital asset purchases, such as machinery, vehicles, furniture and fixtures, and computer equipment. It also provides a basis for measuring the actual capital expenditures performance during the budget period and making adjustments as needed.
Cash budget
The cash budget is a functional budget that estimates the expected cash inflows and outflows for the upcoming budget period. It considers the expected sales revenue, production costs, overhead expenses, capital expenditures, and financing activities. This budget helps the company to manage its cash flow and ensure that it has sufficient cash on hand to meet its expenses and investments.
| Item | Amount (in Rs.) |
| Beginning Cash Balance | 500,000 |
| Cash Inflows: | |
| Sales Revenue | 3,000,000 |
| Loans | 1,000,000 |
| Total Cash Inflows | 4,000,000 |
| Cash Outflows: | |
| Direct Material Purchases | 1,500,000 |
| Direct Labor and Overhead Costs | 500,000 |
| Rent and Utilities | 200,000 |
| Marketing and Advertising | 300,000 |
| Salaries and Benefits | 600,000 |
| Interest and Taxes | 400,000 |
| Total Cash Outflows | 3,500,000 |
| Net Cash Flow | 500,000 |
| Ending Cash Balance | 1,000,000 |
The cash budget table lists all of the cash inflows and outflows for the budget period in rupees. The beginning cash balance is the amount of cash the company has at the start of the budget period. The cash inflows section lists the sources of cash for the budget period, such as sales revenue and loans. The total cash inflows is the sum of all sources of cash.
The cash outflows section lists all of the expenses the company will incur during the budget period, such as direct material purchases, direct labor and overhead costs, rent and utilities, marketing and advertising expenses, salaries and benefits, and interest and taxes. The total cash outflows is the sum of all expenses.
The net cash flow is the difference between the total cash inflows and the total cash outflows. A positive net cash flow indicates that the company has more cash coming in than going out, while a negative net cash flow indicates that the company has more cash going out than coming in.
The ending cash balance is the sum of the beginning cash balance and the net cash flow. This budget provides a basis for the company to plan and manage its cash flows during the budget period to ensure that it has enough cash to meet its obligations and invest in growth opportunities.
Personnel budget
The personnel budget is a functional budget that outlines the planned human resources expenses, including salaries, benefits, and training costs. It considers the company’s staffing needs and the cost of attracting, hiring, and retaining employees. This budget helps the company to manage its personnel expenses and ensure that it has the necessary staff to meet its production and operational needs.
| Position | Number of Employees | Salary per Employee (in Rs.) | Total Salary (in Rs.) |
| Manager | 1 | 100,000 | 100,000 |
| Sales Representatives | 5 | 50,000 | 250,000 |
| Customer Service Reps | 3 | 40,000 | 120,000 |
| Administrative Support | 2 | 30,000 | 60,000 |
| Total | 11 | – | 530,000 |
The personnel budget table lists all of the positions that the company will need to fill during the budget period, the number of employees required for each position, the salary per employee, and the total salary for each position. The total salary is calculated by multiplying the number of employees by the salary per employee for each position.
The personnel budget provides a basis for the company to plan and manage its human resources during the budget period. It enables the company to forecast its personnel expenses, allocate resources effectively, and identify any potential issues in advance. The personnel budget also provides a basis for measuring actual performance during the budget period and making adjustments as needed.
Overhead budget
The overhead budget is a functional budget that estimates the indirect costs associated with running the business, such as rent, utilities, insurance, and other administrative expenses. It considers the company’s historical data and the expected changes in the business environment to forecast the overhead expenses. This budget helps the company to manage its overhead expenses and ensure that it has sufficient resources to support its operations.
| Overhead Item | Amount (in Rs.) |
| Rent | 50,000 |
| Utilities | 10,000 |
| Office Supplies | 5,000 |
| Insurance | 8,000 |
| Depreciation | 20,000 |
| Repairs and Maintenance | 15,000 |
| Total Overhead Expenses | 108,000 |
The overhead budget table lists all of the overhead items that the company will incur during the budget period, such as rent, utilities, office supplies, insurance, depreciation, and repairs and maintenance. The amount for each overhead item is listed in rupees.
The total overhead expenses is the sum of all overhead items. The overhead budget provides a basis for the company to plan and manage its overhead expenses during the budget period. It enables the company to forecast its overhead expenses, allocate resources effectively, and identify any potential issues in advance. The overhead budget also provides a basis for measuring actual performance during the budget period and making adjustments as needed.