A budget is the financial blueprint or action plan for an organization, division, business unit, or department. It translates strategic plans into measurable expenditures and anticipated returns over a period of time.
Organizations use different types of budgets for different purposes:
- An operating budget reflects day-to-day expenses and depreciation (the current portion of capitalized expenses). It typically covers a one-year period. Department, division, and unit managers are usually asked to develop an operating budget for their part of the business.
- A capital budget shows the planned outlays for investments in plant, equipment, and product development. It typically covers longer periods—3, 5, or 10 years. Managers throughout an organization may be expected to prepare or contribute to this type of budget.
- A cash budget addresses expected cash flows during the given forecast period, based on information from the operating and capital budgets. The company’s finance department typically prepares this. This type of budget is essential for ensuring the company has enough cash and credit (liquidity) to meets its expected cash outlays.
The operating budget captures how an organization plans to carry out its overall strategy day to day.
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