Putting It Together: Budgeting for Operations

A flowchart titled “Types of Budgets”. 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 operating budget. There are also arrows pointing from the cost of goods sold budget and the SG&A budget to the cash budget.

One final note: budgeting is an iterative process. The first draft of the budget may show a cash shortage that involves going back over the plan to cut costs, borrow money, or rethink the product mix entirely. Or there may be a cash excess that could be reinvested in new equipment that would ultimately reduce costs and/or increase production. Also, as soon as the budget is complete and the company moves into executing the plan, managerial accountants, in conjunction with the financial accountants, must produce progress and performance reports in order to monitor and control operations, using the information gathered in that process to begin to quantify management’s future plans. Therefore, budgeting is a continuous task.

In addition, for a new business seeking funding, a critical component of the business plan is the projected financial statements and forecasts, including sales, production, and cash flows.

Here is one last look at the budgeting process:

You can view the transcript for “How to Build a Basic Financial Projection – Business Finance” here (opens in new window).