WHATS IN A BUDGET?

Most of us are aware that every Nation creates budgets for earnings and expenses at the beginning of the financial year. Most of you probably also run some sort of budget for your home every month. You match your income with your expenditure and postpone any expenditure you cannot currently meet to the next month or you may borrow to meet the expense, often on a credit card!

Similarly small and large business entities also budget for their finances for the year. This process results in an estimate of the total amount of money the business requires to meet its capital and operating expenses during the coming work year as well as the total amount of funds available to expend.

The term budget is derived from the French “Bougette” or purse. It is a list of all planned expenses and expected revenues. In short it is an organizational plan or forecast that is defined in monetary terms. Management Accountants prefer to utilize dynamic budgets that are flexible and useful to business managers.

To draw up a budget the business needs to know how much cash is available or can be generated from different sources and placed at their disposal during a financial year. They take into consideration:

• cash on hand
• cash in bank
• sales receivables
• debts that will get paid over the year
• cash from sale of assets
• any loans that they can avail

This provides an accurate estimate of how much cash they are likely to have at their disposal at different points of time in the year. A specific type of budget called a ‘budgeted Cashflow statement’ directs and monitors cash movement in the business.

A business also needs to know what kind of expenses they will have to meet during the year. They will estimate:

• expenses that will come up during the year
• loans that will have to be paid back
• other payables that may fall due during the year
• capital expenditure that is urgently required for maintaining or expanding the business
• provisions for payment of taxes on estimated income of the coming year
• provisions for wage liabilities such as superannuation and PAYG withholding

These extrapolated figures will forecast the cash requirements of the business at different points of time during a financial year.

It must be remembered that only cash actually available can be spent. If the expense anticipated exceeds estimated income—a deficit budget will result. The deficit will have to be made good by borrowings or other means. This may require requesting the partners to bring additional capital into the business, a sole trader foregoing some drawings or, if the business is a company, issuing additional equity shares to increase the capital available with the company.

For assistance with budgeting or business planning please use our Contact Us page.

The Bean Countess