Lesson 3.
Budget Preparation
Business Finance
Accountancy, Business, and Management
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Learning Competency
Illustrate the formula and format for the preparation of
budgets and projected financial statement (ABM_BF12-IIIc-
d-11).
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Learning Objectives
At the end of this lesson, you should be able to do the following:
● Define budget, its purpose, and types.
● Demonstrate the process of creating a budget.
● Prepare different types of budgets.
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Budget Preparation
● One of the critical aspects
of managing resources
● Employed to avoid
miscalculation and
bankruptcy
● “Living within means”
4
Budgeting
● Part of a financial plan
● Tool for financial control
● Guides spending Budget
decisions
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Budgeting
Presents the expected
revenues, spending, and
investment needs over a Budget
period of time
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Budgeting
● The amount of money
that businesses predict
Sales Forecast they will receive from
sales
● The basis for budgets
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Budgeting
Production
Sales budget
budget
Sales Forecast 1 2 3 4
Operating
Cash budget
budget
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Budgeting
To project income and
expenditures
● predict gain or loss
● provides a model of how the
business might perform
financially
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Purpose of Budget Preparation
To guide decisions
● creates a blueprint for the
decision-making process
● places expenditures under
tight control
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Purpose of Budget Preparation
To monitor business
performance
allows the measuring of actual
business performance against
the projected business
performance
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Types of Budgets
The most common types of budgets prepared by business
are as follows:
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Types of Budgets
● involves realistic
projections of the
company's sales revenue
and expenses Sales Budget
● estimates earnings and
foresee production
requirements
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Types of Budgets
Sales Budget
Projected Sales Revenue = Units to Be sold × Unit Selling Price
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Types of Budgets
reveals how much the
business must produce to
Production Budget meet sales and inventory
requirements
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Types of Budgets
Production Budget
Required Production (in Units) = Projected Sales + Target Ending
Inventories – Beginning Inventories
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Types of Budgets
● shows a business's
projected revenue and
expenses for a specific
period
● formulated at the end of Operating Budget
the year to show the
expected activity for the
following year
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Types of Budgets
Operating Budget Components
● Sales
● Production
● Direct materials
● Direct labor
● Overhead
● Administrative expenses
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Types of Budgets
● an estimation of a
business's cash flow over
Cash Budget a specific period
● assesses the sufficiency
of cash
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Types of Budget (Cash Budget)
Cash Receipts Cash Disbursements
all of a company's cash all cash outlays by the
inflows within a given company within a given
financial period financial period
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Types of Budget (Cash Budget)
Excess Cash Balance
Excess Cash Balance
● the required total = Ending Cash – Acceptable
financing Minimum Cash Balance
● remaining funds may be
invested
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Keep in Mind
● A budget is a vital part of a business organization’s financial plan. It
presents the expected revenues, spending, and investment needs
over a period of time. The purpose of budgeting is to project income
and expenditure, guide decisions, and monitor business
performance.
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Keep in Mind
● Business organizations prepare different types of budget, among
these are as follows:
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Keep in Mind
● The sales budget foresees the sales revenue and expenses and how
much the unit should be sold in a specific period.
● The production budget determines the number of finished goods
which should be produced based on the expected number of units
sold, the required ending inventory level, and the number of
beginning inventory units.
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Keep in Mind
● The operating budget consists of all possible expenses and revenues
a business expects to use for its operations.
● The cash budget summarizes monthly receipts and payments. It
estimates the business’s cash flow over a specific period.
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