Page 409 - Business Principles and Management

Unit 5
Technology tip
Both large and small compa-
nies can now use Internet-
based financial programs
rather than maintain finan-
cial software on a company
computer. With online pro-
grams, authorized employ-
ees, suppliers, customers,
and others needing access
to specific financial infor- also budget to replace worn-out or obsolete fixed assets. For instance, if a com-
mation from the company
can log on anytime from
any computer in the world
to input, retrieve, or work
with company records. Of
course the company must
ensure that online records
are secure and protected.
396
In large businesses, the final overall budget for a business is made up of several
specific budgets, such as the sales, merchandising, advertising, cash, capital, and
operating budgets. Most specialized budgets are based on sales and income projec-
tions. However, in some types of businesses, either the production capacity or the
financial capacity of the business or the unit for which the budget is being prepared
must be determined first. Sales and all other estimates are then based on the amount
that can be produced or the available financial resources for the time period.
START-UP BUDGET The start-up budget projects income and expenses from the
beginning of a new business until it becomes profitable. A start-up budget is
usually prepared in large and established businesses whenever a new venture is
being planned, such as the introduction of a new product, expansion into a new
market, or the development of a new type of business operation. Business start-
ups usually require large expenditures for equipment, inventory, salaries, and
operating expenses. Income will not be realized for some time while expenses
grow. Even when the new company begins to sell products and services, the
income will not be adequate to cover the initial expenses. A start-up budget
will identify the start-up costs, initial operating expenses, types and sources
of financing, and projected income for the time period of the budget.
OPERATING BUDGET An operating budget is a plan showing projected sales, costs,
expenses, and profits for the ongoing operations of a business. It projects operat-
ing income and expenses for the entire business or for a specific part of the busi-
ness for an identified time period such as three months, six months, or a year.
The operating budget may also be called an income statement budget because
it uses the same financial categories as the company’s income statement. By
subtracting its total projected costs and expenses from projected income, a busi-
ness can estimate the profitability of its operations.
CASH BUDGET During normal operations, companies receive cash from sales and
from borrowing and make cash payments for purchases and loan payments. The
cash budget is an estimate of the flow of cash into and out of the business over
a specified time period. Companies need a cash budget to make certain that
enough cash will be available at the right times to meet payments as they come
due. Cash comes into the company from two primary sources: (1) cash receipts
and/or (2) borrowing. When companies borrow money, they must eventually
pay it back. Therefore, the cash budget shows borrowed money as cash flowing
in and repayments as cash flowing out when each payment is due.
Figure 15-3 shows a cash budget for a small business. Cash budgets are impor-
tant for all companies, no matter how large or successful they are. A company can
be highly profitable yet not have enough cash on hand at the right times to pay its
bills. This situation could cause the company to borrow unnecessarily.
CAPITAL BUDGET Every business must plan for the costs of buildings, equipment,
and other expensive purchases needed for its operations. Over the years, it must
pany owns its own trucks and vans for distributing products, each will need to be
replaced after a certain number of miles or years. A growing business plans for
expansion by budgeting for the costs of new equipment, additions to buildings,
and other major investments.
A capital budget is a financial plan for replacing fixed assets or acquiring new
ones. Capital budgeting is important because acquiring assets ties up large sums
of money for long periods of time. A wrong decision can be costly. For example,
a decision to buy three new trucks that have a projected life of eight years involves