Budget Cycles, Federal Process, and Budget Types
Budget Cycle Fundamentals
What is a Budget Cycle?
A budget cycle is the time frame a budget covers. Companies typically use monthly, quarterly, or annual budget cycles to manage costs and administrative duties.
Purposes of a Budget Cycle
- Helping control costs.
- Making it easier for a finance department to prepare reports.
- Enabling regular variance analyses.
For example, if a production department has a limit on how much it can spend on labor during a quarter, it can better plan its workflow.
Phases of Budgeting
- Preparing the Budget
- Approving the Budget
- Executing the Budget
The Federal Budget Process
What is the Federal Budget?
The federal budget is the government’s estimate of spending and revenue for each fiscal year. The revenue for most governments comes from taxes.
Steps in the Federal Budget Process
- The President sends a budget request to Congress each February for the coming fiscal year.
- The House Committee on the Budget and its Senate counterpart write and vote on their own budget resolutions.
- House and Senate Subcommittees “markup” (draft and amend) appropriation bills.
- The full House and Senate then debate and vote on appropriations bills.
- The President signs each appropriations bill into law.
Common Types of Budgets
Master Budget
A master budget is an aggregate of a company’s individual budgets designed to present a complete picture of its financial activity and health. The master budget combines factors like sales, operating expenses, assets, and income streams to allow companies to establish goals and evaluate their overall performance, as well as that of individual cost centers within the organization. Master budgets are often used in larger companies to keep all individual managers aligned.
Operating Budget
An operating budget is a forecast and analysis of projected income and expenses over the course of a specified time period. To create an accurate picture, operating budgets must account for factors such as sales, production, labor costs, materials costs, overhead, manufacturing costs, and administrative expenses. Operating budgets are generally created on a weekly, monthly, or yearly basis. A manager might compare these reports month after month to see if a company is overspending on supplies.
Cash Flow Budget
A cash flow budget is a means of projecting how and when cash comes in and flows out of a business within a specified time period. It can be useful in helping a company determine whether it’s managing its cash wisely. Cash flow budgets consider factors such as accounts payable and accounts receivable to assess whether a company has ample cash on hand to continue operating, the extent to which it is using its cash productively, and its likelihood of generating cash in the near future. A construction company, for example, might use its cash flow budget to determine whether it can start a new building project before getting paid for the work it has in progress.
Financial Budget
A financial budget presents a company’s strategy for managing its assets, cash flow, income, and expenses. A financial budget is used to establish a picture of a company’s financial health and present a comprehensive overview of its spending relative to revenues from core operations. A software company, for instance, might use its financial budget to determine its value in the context of a public stock offering or merger.
Static Budget
A static budget is a fixed budget that remains unaltered regardless of changes in factors such as sales volume or revenue. A plumbing supply company, for example, might have a static budget in place each year for warehousing and storage, regardless of how much inventory it moves in and out due to increased or decreased sales.