1.6 Budget Types

Now that we are more familiar with how costs are determined and categorized, we can return to the overall idea of budgeting in greater detail. In most businesses, the most important, over-arching budget for the entire organization is known as the master budget, and represents a comprehensive financial plan  for the entire organization. The  master budget is typically composed to two distinct parts: the operating budget and the financial budget. These in turn can be composed of other, smaller budgets representing specific parts of the businesses costs and revenues, as shown in the table below. This text will not provide a detailed overview of every budget type listed below, but will explain the general functions of operating and financial budgets.

The operating budget shows the incoming-generating activities of an organization . This includes all costs and revenues associated with sales, production, inventory, overhead, etc. All of the budgets we have looked at so far in this chapter have been operating budgets. Businesses will usually prepare the operating budget for their business prior to the financial budget, since elements of the financial budget will be affected by the operating budget.

The financial budget shows an overall financial position by detailing the inflow and outflow of cash from a company. The elements of this budget are not directly tied to the income-generation  of the company, and include any expected borrowing or investments, and managing the company’s assets.

While these examples  represent the most common format for budgets used within businesses, there are also other  approaches to budgeting which are useful to understand.