The budget, which reflects the expected sources of funds and the direction of their use in the future period, is called financial. Components of financial budget are in the following.
Three components
The financial budget includes three main components − the budget of capital investments, the company’s cash flow budget and the budget balance sheet.
Budget of capital investments
This budget is a capital expenditure plan indicating the sources of funding. The budget of capital investments includes both plans for the acquisition of fixed assets and intangible assets, as well as long-term investment projects. This budget is often made up separately from the operational budget. The approval of the budget for capital investments means only agreement in principle. In the future, a special permit is required before commencing work on the project. This budget reflects the interaction between the company and its counterparties (financial, credit, insurance organizations, financial market) in relation to receiving cash and their investing in capital assets. It shows the estimated cost of each acquisition and the timing of the corresponding costs.
Cash flow budget
The operational budget is usually made in the form of a balance of income and expenses. It must be transformed for financial planning purposes. The cash budget is a result of this transformation. The manager for finance uses this budget in his/her plans.
When preparing this budget (if necessary), the budget balance and the income statement are reviewed, taking into account the adjustment of indicators to reflect planned sources and cash consumption. In practice, a different method is most often used: an analysis of only those plans that affect the cash flows, and an assessment of each source of their receipt.
In general, this budget shows the expected final balance in the cash account at the end of the budget period. Proceeds from the main activity in this case are calculated taking into account changes in accounts receivable, and expenses − taking into account changes in the accounts payable.
Budget balance sheet
This balance sheet shows what means of financing the company has and how they are used. The change in the structure of the balance affects the cash flow. In addition, it also shows what means of financing the company has, how these funds are used, and describes the financial condition of the company on a specific date. In order to predict the balance, it is needed not only the value of the normalized current assets and the value of accounts receivable, but also the value of the normalized current assets and receivables. If the discrepancy in the forecasts of the active and passive parts of the balance sheet gives an idea of the lack (excess) of financing, then the decision on the method of financing is taken on the basis of additional analysis.
Success is not an accident. It requires hard work and careful planning. Crash is always caused by unforeseen events. And although planning can not take into account everything, it can prepare the company for decision-making and, if they arise, be protected from the wrong path. The budget increases the chances of the company to succeed.
