FINANCE

Financial Budgeting



Financial Budgeting

Introduction

Budgeting refers to decisions about how much funding to provide for the programs, staffs, and infrastructures of government, as well as about the processes used to arrive at funding levels. A budget gives a projection of revenue and expense over the course of a year. It is a plan that communicates an organization's priorities and a tool that can be used to monitor revenue and expense. A budget is usually prepared by an executive director and approved by a board of directors. Operating budgets, program budgets, cash flow budgets, and capital budgets are frequently used by the organizations, worldwide.

Discussion

Operating budgets, often referred to as simply the budget, are prepared on a cash basis; expense is incurred, and revenue is received over the 12 consecutive months that make up the fiscal year. Usually, a budget is balanced; that is, revenue is equal to expense. The process of formulating expense and revenue projections often begins 6 months before the start of a new fiscal year. It involves the executive director, program director(s) or department heads, and the chief financial officer (if there is one). Typically, an executive director asks program directors to project expenses for their program. Revenue is usually estimated after expense. Revenue and expense planning may also involve the treasurer of the board of directors or a board finance committee. The board of directors formally approves the final budget.

Different Types of Budgets

Budgets have different purposes. An annual budget projects operating expense and revenue for a fiscal year. Operating budgets do not reflect the extraordinary expense and revenue of capital improvements. Capital budgets project expense and revenue associated with the acquisition of large, usually fixed assets, for example, a building, computers, or a new telephone system. It is better to create separate budgets for capital projects. Including one-time capital expense and revenue in an annual budget would distort operating revenue and expense.

Operating Budget

Operating budgets itemize projected expense (program, administrative, and fundraising) along with major sources of revenue. Usually, a detailed schedule explains how these projections are calculated.

Program Budget

A budget by program, responsibility center, or cost center is often used. Special project or program budgets are separate plans that focus on an activity that generates revenue and expense. The columns in any organization's annual operating budget reflect expense and revenue associated with particular programs. This approach allows managers to match expense with restricted and unrestricted revenue allocated to a specific program. Performance of a program can also be assessed.

Cash Flow Budget

A cash flow budget can be used to match the flow of revenue and expense. Cash flow budgets project revenue and expense over 12 months. A cash flow budget is helpful when an organization receives grants at different times of the year or must wait for reimbursement associated with services that have already been delivered. A cash flow budget starts with the actual cash balance on the first day of the current fiscal year.

Capital Budget

A capital budget projects revenue and expense associated with the acquisition of assets that ...