Understanding the Different Types of Budgets

Value proposition & zero-based budgeting are two main types of approaches when it comes to budgeting. Learn more about master budgets, operating budgets, cash flow budgets & static budgets.

Understanding the Different Types of Budgets

When it comes to budgeting, there are two main types of approaches: value proposition budgeting and zero-based budgeting. Value proposition budgeting is a way of thinking that everything included in the budget adds value to the company. This type of budgeting aims to avoid unnecessary spending, but it is not as precise as zero-based budgeting. According to a survey conducted by Clutch, 61 percent of small businesses have not created a formal budget.

Without a budget, it can be difficult to understand the performance of a company. A master budget is an aggregation of lower-level budgets created by the different functional areas of an organization. It uses inputs from the financial statements, cash forecast and financial plan. Management teams use master budgets to plan activities that will help them reach their business goals. In larger organizations, senior management is responsible for creating several iterations of the master budget before it is finalized.

Once it has been reviewed for the last time, funds can be allocated for specific business activities. Smaller companies often use spreadsheets to create their master budgets, but replacing spreadsheets with efficient budgeting software usually reduces errors. An operating budget shows a company's projected revenues and associated expenses over a period of time. It is similar to a profit and loss report and includes fixed cost, variable cost, capital costs and non-operating expenses. This budget is a high-level summary report, but each item is backed up with relevant details.

This information can be used to check if the company is spending according to its plans. A cash flow budget gives an estimate of money that comes in or out of a company during a specific period of time. Organizations create cash budgets using deductions from sales and production forecasts, and estimating accounts payable and receivable. For any company that plans to hire employees to achieve its goals, it will be important to have a work budget. It helps you determine the workforce you'll need to achieve your goals, so you can plan payroll for all those employees.

In addition to planning for regular staffing, it also helps you allocate expenses to seasonal workers. A static budget is an estimate of income and expenses that will remain fixed throughout the year. The items in this budget can be used as objectives to be met regardless of any increase or decrease in sales. Static budgets are usually prepared by non-profit organizations, educational institutions or government agencies that are allocated a fixed amount to be used in their activities in each area. Activity-based budgeting is a type of top-down budget that determines the amount of inputs needed to support the objectives or products set by the company. This approach is one of five main types of budgeting processes that business leaders have at their disposal.

At the most basic level, it is a legal document that gives local government officials the authority to incur obligations and pay expenses.

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