Introduction to Financial Budgets

What you will learn to do: Prepare a financial budget for a manufacturing firm

A flowchart titled “Types of Budgets”. The entire area labeled financial budget is highlighted in yellow. At the top is the sales budget. The sales budget has two arrows pointing to the production budget and the SG&A budget. The production budget has three arrows pointing to the materials budget, labor budget, and manufacturing overhead budget. Those three budgets are all pointing to the cost of goods sold budget. The sales, production, materials, labor, manufacturing overhead, cost of goods sold, and SG&A budget boxes are all blue and there is a bracket labeling those as the operating budget. Below the operating budget is a horizontal line showing the capital expenditures budget in red on the left, and going to the right from there, an arrow pointing to the cash budget, with another arrow pointing to the budgeted income statement, and a final arrow pointing to the budgeted balance sheet. The cash budget, budgeted income statement, and budgeted balance sheet are all green and there is a bracket labeling those as the financial budget. There are also arrows pointing from the cost of goods sold budget and the SG&A budget to the cash budget.

The classic financial budget includes projected cash flows, a balance sheet, and an income statement, all based on the operating budget. The evaluation of incomes and expenses is done on a monthly, quarterly, half-yearly, or annual basis, depending on the needs of the organization. Most often, budgeting is done on a monthly basis if possible, in order to give management current information for decision-making. A financial budget is a very powerful tool to achieve the long-term goals of any business. Importantly, it also keeps the shareholders and other members of the organization updated about the functioning of the business.

Here is an overview of the three main financial statements that businesses use to report to outside investors. In budgeting, the financial statements are pro forma, which means they are prepared “as if” the budget reflected actual results.

You can view the transcript for “Three Key Financial Statements” here (opens in new window).

For budgeting purposes, instead of a statement of cash flows, which is usually prepared last for financial reporting purposes, we’ll start with a projected cash budget.

When you are done with this section, you will be able to:

  • Prepare a cash budget
  • Prepare a budgeted income statement
  • Prepare a budgeted balance sheet

Learning Activities

The learning activities for this section include the following:

  • Reading: Cash Budget
  • Self Check: Cash Budget
  • Reading: Budgeted Income Statement
  • Self Check: Budgeted Income Statement
  • Reading: Budgeted Balance Sheet
  • Self Check: Budgeted Balance Sheet