Budget models are financial projections that allow companies to plan for future cash inflows and outflows. Companies will have an annual meeting to determine the budget and plan for the upcoming fiscal year. Budgets have an enormous amount of usefulness in a company and helps management plan for good and bad business scenarios.
- Budget planning models support general business operations by setting financial goals for each operational department. These goals will help managers to understand the sale amount they need to achieve to pay for their department's expenses. When general operations have stated financial goals, it forces them to operate at the lowest cost while achieving the highest level of priority. Variations in the budget model are not acceptable and must be dealt with by cutting costs in other operational areas.
- Budget models help companies determine how much income they must earn to pay for the expenses generated from normal business operations. Companies will also review other parts of the budget model relative to forecasted earnings to ensure that no extra expenses are being incurred to generate sales. Inventories and cost of goods sold (COGS) will also be reviewed to determine if the company is overpaying vendors for supplies and production materials.
- Many companies have capital planning budgets to determine if any major expenditures for equipment or production facilities are needed. In the capital budget planning model, companies will determine what financing options are available to pay for these major purchases. Financing options may include bank loans, company bonds and equity financing from stock issuance. Each type of financing will have the pros and cons listed to see how the budget will be affected from each option.
- Each department within a company will have a budget, regardless of how big or small the department. Support departments like accounting, information technology and general office staff will have a budget for planned expenses. These budgets may fall under a larger departmental budget like administrative or operating. These department budget models help companies plan for every expense incurred throughout the company end ensure that no extra expenses occur unnecessarily.
- While most budget models are static and do not change during the fiscal year, some companies may create several different budget planning models to plan for higher- or lower-than expected sales. Creating extra budgets will enable management to allow for changes in company spending based on the needs of each department. Becoming too stringent on spending and running business operations solely on budget projections will hamper a company's effectiveness. Properly understanding and responding to the market place allows companies to use their budgets effectively and maintain their competitive edge.
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