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  Functional Budgets

Introduction to Functional Budgets

The functional budgets are prepared for each function of the organization. These budgets are generally prepared for a period of one year and then broken down to each month. The following budgets are included in this category.

  • Sales Budget:

A Sales Budget depicts forecast of supposed sales in the future period [the period is well-defined] and it expressed in quantity of the product to be sold and the monetary value of the same. A Sales Budget might be ready according to the product, according to the territories/area/country, according to the customer group, according to the salesmen as well as according to the time such as quarter wise, weekly, month wise, etc. The following factors are taken into consideration when preparing a sales budget.

Ø  Analysis of past sales: Analysis of sales for the last 5-10 years will give valuable information such as the long term trend, seasonal trends, cyclical fluctuations and appropriate information such as shift in demand, customer preference analysis, competition and other environmental factors. This information can be employed to predict the similarly future demand of the product.

Ø  Estimates given by the sales staff: Sales staff of the business organization works in the field and therefore they know the market situation thoroughly. They have extremely close interaction with the market and are in a better position to identify the demand pattern and other such trends. Though, care is to be taken that the subjective element in the sales estimates provided through the sales staff should be eliminated to arrive at a realistic sales forecast.

Ø  Market Potential Analysis: Marketing Research assists any business organization to collect the data concerning to markets, demand pattern, customer preferences, market potential and other issues such as economic factors and environmental factors. By this analysis, market potential can be worked out that will be used in the sales budget.

Ø  Dependent Factor: Demand of a product is relies upon specific factors. For instance, the demand for petrol and diesel is depend on the number of vehicles plying although the roads. Analysis of such type of dependent factor will help to ready the sales forecast that can be used in the sales budget.

A business firm can make use of any of the above techniques or a combination of the above techniques to prepare sales forecast and incorporate similar in the sales budget.

  • Production Budget: This budget depicts the production target to be get in the next year or the future period. The production budget is ready in quantity and in monetary terms. Before preparation of this budget it is essential to get knowledge of the principal budget factor or the key factor. The principal budget factor can be sales demand or the production availability or capacity of raw material. The policy of the management concerning the inventory is also taken into consideration. The production budget is generally got ready for a period of one year and then split down on monthly basis. The targets of Production are decided through adding the budgeted closing inventory in the sales forecast and subtracting the opening inventory from the total of very similar. Production Cost Budget is ready through multiplying the production targets through the budgeted production cost per unit.
  • Material Purchase Budget: This budget depicts the quantity of materials to be purchased throughout the coming year. Production budget is the starting point if it is the key factor for the preparation of this budget. It becomes the starting point, if the raw material availability is the key factor. The desired closing inventory of the raw materials is added to the need according to the production budget and the opening inventory is subtracted from the gross needs. This budget is ready in quantity and in the monetary terms and assists immensely in planning of the purchases of raw materials. Financial resources, several levels of materials such as maximum, minimum, availability of storage space, re-order and economic order quantity are taken into consideration when preparing this budget. A separate material utilization budget might also be ready as a preparation of material purchase budget.
  • Cash Budget: A cash budget is an estimate of cash receipts and cash payments ready for each month. In this budget all supposed payments, revenue and capital and all receipts, capital and revenue are taken into consideration. The major purpose of cash budget is to forecast the receipts and payments in cash that is why the firm will be capable to find out the cash balance at the end of the budget period. This will assist the firm to know whether there will be extra cash or deficit at the end of the budget period. It will assist them to plan for either investing the extra or raise essential amount to finance the deficit. Cash Budget is ready in several ways, but the very popular form of the same is through the method of Receipt and Payment method.
  • Direct Labor Budget: The labor budget approximates the labor needed for smooth and uninterrupted production. The labor budget depicts the number of each type or grade of workers needed in each period to get the budgeted output, budgeted cost of such type of labor, period wise and period of training essential for different types of labor
  • Factory Overhead Budget: This budget is ready for planning of the factory overheads to be acquired during the budget period. In this budget the overheads have to be depicted department wise so that responsibility can be fixed on proper persons. Categorization of factory overheads into fixed and variable components should also be displayed in this budget.

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