The Budgeting Approach – The 9 Budgets to Master

Welcome to this chapter on the budgetary approach!

Here's what you'll learn in this article:

• The budgetary approach
• The sales budget
• The financing budget
• The cash receipts budget
• The purchasing budget
• The budget for other expenses
• The investment budget
• The VAT budget
• The disbursement budget
• The cash budget
• Conclusion

 

The budgetary approach

What is a budget for?

The business unit is required to make forecasts to encrypt its objectives: to achieve.

The forecasts can be distinguished from three angles:

1. long-term forecasts (5 years and more): this is the strategic levelIn this budgetary approach, the company takes into account its strengths, its weaknesses, its environment, the market, its profitability, and the competition.
2. medium-term forecasts (2 to 5 years): this is the operational level.
3. short-term forecasts (up to one year): this is the phase of developing the budgets.

Within the business unit and through budgets, objectives and the means to achieve them are allocated to the various managers.

 

How to make a budget?

There is no official method for making a budget. In practice, budgets are made in the form of paintings.

The columns represent time which can be months, weeks, quarters or semesters.

The lines represent the labels such as the payment deadline, the charge to be distributed, a heading in the income statement…

Budgets are established in a logical order to ultimately arrive at the development of the cash budget.

The main difficulties in developing a budget are:

• Collections are not made at the time of sale. Customers often pay on credit. There is therefore a time lag.
• disbursements are often made later, causing debts.
• the amounts from the operating account are HT, while the bills are paid VAT Incl..
• The amount to be included in a budget can be based on a sum, a percentage or even a ratio.

 

The sales budget

The sales budget brings together all the sales forecasts determined in the sales program.

It is possible to build sales budgets by product, or by type of customer (individuals, major accounts, public companies, etc.).

Here is an example of a sales budget:

Of course, an additional line titled “Total” would make no sense!

This budget does not take into account collection delay issues. Only sales invoiced monthly appear in this table.

 

The financing budget

The financing budget makes it possible to group together all the financing linked to the investments planned by the business unit.

This could be a loan, a subsidy received from the State, transfer of property, etc.

In this financing budget, the amounts are all in raw values. They are neither inclusive of VAT nor exclusive of VAT.

 

The cash receipts budget

The cash receipts budget groups together all cash receipts month by month. It is the synthesis of the sales budget and the financing budget.

It is mainly about sales, but not only. It can include grants, borrowed money, margins or any other type of receipts.

Sales are to be taken into account for their amount including tax, amount paid by customers.

It is necessary to distinguish the regulated part in cash, so cashed in within one month of the sale of the settled portion on account, which results in deferred collection.

It therefore includes the division forecasts of amounts to be collected.

 

It is sometimes necessary to use an accounting statement: the balance sheet.

Thanks to this, it is possible to recover encrypted elements having a past origin, but with future consequences (example: a debt from a sale to be collected over several months).

We must not forget to take into account trade receivables which are amounts owed by customers.

I would also like to remind you that customer receivables are by default amounts including tax. In fact, these are the total amounts including tax of the invoices that are due.

 

The purchasing budget in the budgetary process

The development of the purchasing budget is based on the sales budget. Depending on the market demand, the business unit organizes itself to purchase goods and raw materials in order to meet customer needs.

It has the same structure as the sales budget:

 

Of course, an additional line titled “Total” would make no sense!

This budget does not take into account collection delay issues. Only purchases invoiced monthly appear in this table.

 

The budget for other expenses

Of course, purchases are not included in this budget. These are the following items: salaries, social security contributions relating to salaries, taxes, rent, insurance, interest charges on loans, VAT to be paid, etc.

The amounts to be taken into account are inclusive of tax (when it is consistent and possible!).

Here again, it is appropriate to distinguish the part settled in cash from the part settled on credit giving rise to a deferred disbursement.

It is sometimes necessary to use an accounting statement: the balance sheet.

Thanks to this, it is possible to recover encrypted elements having a past origin, but with future consequences.

 

The investment budget

The capital budget includes all the fixed assets that the business unit plans to acquire in the coming months.

The amounts to be taken into account are inclusive of tax.

You do not need to take into account the amount of depreciation relating to these fixed assets. In fact, these are not expenses paid out but calculated expenses.

 

The VAT budget in the budgetary process

Le VAT budget brings together all the amounts of VAT collected and Deductible VAT. No other amounts should appear in this table.

There is, however, one exception: the VAT credit.

 

What is VAT credit?

The VAT credit is the amount owed by the State when the difference between the VAT collected and the deductible VAT is negative.

 

The purpose of this budget is to know the amount of the VAT to be paid for the period considered. Therefore the table must include all the elements of the formula to be applied.

Here are the elements that the VAT budget must include:

• VAT to be paid
• VAT collected on sales
• VAT deductible on purchases
• deductible VAT on other charges
• deductible VAT on fixed assets
• deductible VAT on services
• VAT to be paid

The latter is a false friend. Indeed, the VAT that will ultimately be paid by the business unit is the VAT to be paid and not the VAT to be paid.

As for the formula to apply, I invite you to read the part concerning VAT in the article Business Calculations: 36 Formulas to Master Them on business calculations.

Here again, the accounting statement called the balance can greatly help you in drawing up this VAT budget.

Here is an example of a VAT budget framework:

 

After calculating the VAT to be paid, you must determine the VAT to be paid.

The VAT to be paid is equal to the amount of VAT to be paid on the previous period. It's just a time lag.

 

The disbursement budget

Overall, it includes the totals of the following budgets: VAT budget, purchases budget, other expenses budget, investments budget, etc.

Here is an example of a disbursement budget framework:

 

It includes all disbursements: supplies, investments, current expenses, etc. These are mainly purchases, current expenses, personnel expenses, interest expenses on loans, VAT to be paid, etc.

The amounts to be taken into account are inclusive of tax, amounts paid by the business unit. It is important to distinguish between the part paid in cash, therefore disbursed the same month, and the part on credit giving rise to a deferred disbursement.

It is sometimes necessary to use an accounting statement: the balance sheet.

Thanks to this, it is possible to recover encrypted elements having a past origin, but with future consequences.

 

The cash budget

This is the synthesis of all previous budgets.

The initial cash flow may be from a previous period specified in a balance sheet. These are the amounts in the various cash accounts.

The initial balance is equal to the final balance of the previous month.

To find the final cash balance, we apply the following formula:

Final balance = Initial balance + cash receipts budget – cash disbursements budget

 

Here is an example of a cash flow budget framework:

 

How to interpret the results of the cash budget?

If the cash is in surplus, the manager has room for maneuver: he can give salespeople more flexibility in negotiating payment deadlines with customers.

This excess cash balance can also constitute a source of financing for future business operations. This cash can also be invested, in order to produce financial income.

 

If you cash balance is negative, banks charge bank charges.

The company can influence collections by organizing destocking operations and/or by encouraging salespeople to better follow regulations and negotiate shorter payment terms.

The business unit can also act on disbursements in merchant if possible longer deadlines with its suppliers.

 

Conclusion on the budgetary approach

Budgets are all interdependent. The cash budget is the synthesis of all budgets. It allows to note the forecast cash balances of the business unit. The manager can thus act accordingly on the decisions to be made.

There you have it, now you know all the steps of the budget process. You no longer have any excuses for not reaching your goal: Get an excellent grade in the Operational Management test!