Budgeting – Beginning With The End In Mind

As companies grow, it is not long before the realization that creating a budget is essential for implementation of growth strategies.  As owners embark on the process, they quickly become aware that the overall operating budget is composed of many little budgets.  The article explores the elements in a budget which differs among manufacturing, retail and distribution and service organizations.

Budgets

The budget process begins with the end result of the revenue generating process – the Revenue budget which is the key driver for several of the other budgets such as the Materials and Labor cost of goods sold budgets.

If the company is a manufacturing company, six key budgets need to be prepared, usually to the order presented:

  • Ending Inventory Budget – The budget determines the beginning, ending and material used based on forecasted sales.
  • Production Budget – This budget calculates the units to be produced as adjusted for beginning and desired ending inventory.
  • Direct Labor Budget – The amount of labor needed to produce the products at the desired level of production is determined by this budget.
  • Direct Materials Budget – The amount of materials needed in order to produce the desired number of products as laid out it the Production Budget.
  • Manufacturing Overhead Budget – This budget includes all the overhead costs expected to be incurred in the manufacturing process.
  • Cost of Goods Sold Budget – This budget pulls together data developed from three manufacturing budgets including direct material, direct labor and manufacturing overhead budgets.  It also take into consideration ending inventory.

In the case of Retail or Wholesale distribution businesses, they will likely have only the Inventory, Direct Labor, Direct Materials and Overhead Budgets. Service businesses will not generally have any of the cost of goods sold budgets.

All business types will have other non-production related budgets.  These are as follows:

  • Sales and Marketing Budget – This budget captures all anticipated costs of sales including labor, travel and marketing expenses.
  • Administrative – This budget includes the costs non-production and non-sales expenses including executive, administrative, accounting, legal and other support  expenses such as supplies, utilities, travel, labor benefits and so forth.

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