Budgeting is an integral part of any business. You cannot expect to manage the financial needs of the business without creating an effective budget that could account for all the expenses and allocate a proportion of income for meeting those expenses. In this article, we are going to highlight the types of budgets. In addition, the different approaches for making a budget that the organizations use in the business are also the top priority of this article. So, get ready to know the basics of budgeting.

Types of budgets:

There can be two sub-categories for defining the types of budgets for the business. These include:

  1. Time-based budgetary types
  2. Operational budgetary types

Time-based budgetary types

The time based budgetary type divides the budgeting in business into three main types. We are discussing each of these types below for better understanding:

1. Yearly budget:

The creation of the budget for the entire year is the yearly budget. This is one of the types of budgets where you make budget on a yearly basis. It means that the income earned in 12 months is apportioned to the expenses of 12 months. One thing worth mentioning here is that a yearly budget does not have to necessarily start from January and End in December. It is solely dependent on the company when to start and end the budgetary year.

2. Monthly budget:

In order to execute the monthly financial operations, the creation of monthly budget takes place. In this budgeting method, the apportionment is done on a monthly basis. So, you can find how much can you earn in a month and how to meet the expenses.

3. Quarterly budget:

Another type of budget is the quarterly budget where three months are considered as the base for deciding the expenditures of the business.

Operational budgetary types:

These types of budgets are the ones that highlight the operational element of the business. They are further divided into subcategories. Here are the subcategories:

1. Master budget:

The budget that contains an overall picture of the budgetary needs of an entire organization is known as the master budget. In this budget calculation, the budget of sales, budget of expenses, cash flow budget and all other budgets are the part of it. The purpose of this budget is to give an overall view of earning and spending on different departments of the organization.

2. Operating budget:

The second most prominent type of budget is the operating budget. In this type of budget, you need to calculate the income and expenses to know if the business has been overspending or under spending. The analysis of sales, which is the main source of income with various heads of expenses results in the formulation of this budget type. These heads include labor cost, material cost, manufacturing cost, overheads, and administration cost. Once each of these expenses is calculated it is compared with the sales or income budget prepared to find the overspending or the under spending of the organization.

3. Cash flow budget:

The budget, which matches the cash received with the cash paid, is the cash flow budget. In this type of budget, you need to focus on the cash in hand element. There are chances that an organization could be going in profits, but the cash available for spending in a particular tenure is zero. In that situation, continuing the business operations won’t be possible, and the company might go bankrupt. So, in order to avoid such a situation, it is essential that you must make an estimate of available cash with an estimate of cash for expenses.

Approaches for budget creation:

The budgeting in business can be measured through a number of techniques. Moreover, these budgeting methods highlight how does an organization plans to take the financial and operational aspects of the business. Some of the budgeting techniques include:

1. Top-down Approach:

In this type of budget, the top management creates a budget considering the objectives of the organization into consideration. After creating the overall budget, the department heads are presented with the budget that they have to run various dimensions of their departments. Later, the department heads allocate this budget to the sub-departments within the main department, and the process continues until it reaches the tactical level.

The basic technique for the creation of this type of budget involves the estimation of the higher levels of costs. Later, the officials sub-categorizes the higher tier levels of budgets into sub-categories. The past records of spending have an important role in sub categorization. The employees at different managerial level do provide their suggestions before the budget creation but accepting them is at the discretion of the top management.

2. Bottom-up approach:

This budget creation method is opposite to top-down approach. In this method, the role of the lower level employees is higher than the top management. This is because the lower level of management determines their financial needs and passes them on to the upper level. Thus, it leads to the creation of an overall budget for the department. Such a practice done by all the department helps in the compilation of the overall budget.

It can increase the level of motivation in the employees, as they are part of decision-making. Moreover, it can also present a realistic situation depending on the real-time analysis of the market prices and situation.

3. Incremental budget:

There is another budgetary approach where the budget from the previous year is increased by a specific amount. So, it means that all the heads of the budget get a similar increase. This type of budget does not support the real-time changes in the prices or the realities of the market in the preparation of the budget. Thus, it cannot represent the changes that are the part of the current environment.

4. Zero-based budgeting:

This is the type of budgeting technique where the old budget is irrelevant for the creation of a new one. In the new budget, the figures that are part of the budget must have a clear justification without. Thus, they must not be dependent on the previous budgetary figures.

These are some of the types of budget that you can use in our business. The right approach for the creation of a budget and the time frame depends upon your individual business needs. So, it would be you who’ll have to decide about the exact budgetary technique that you are going to use in business. But you can definitely have a look at these techniques and approaches to have a better insight about the process.