Budgeting or budget is basically planning all your revenue and expenses ahead. Companies usually project their revenue and expenses for a specific time period, basing it on different external and internal factors. A budget can be for a quarter or half-year or a year. There can be various types of budget on the basis of purpose you want to the budget for and also on the basis of budgeting approaches. Let’s see some of the popular budgeting examples:
Budgeting Examples – Purpose
Sales budget basically depicts the sales expectations of the company. Let’s see an example of the sales budget.
Company A makes mobile phones. For next four years, the company expects to sell 2000, 2200, 2500 and 3000 units respectively. The selling price per unit if $50, and is expected to increase to $55, $60 and $65 in a second, third and fourth year respectively. Also, the company expects to offer a 2% discount on the sales price for all four years. Following will be the sales budget for the company:
|Year 1||Year 2||Year 3||Year 4|
|Sales (Unit) A||2000||2200||2500||3000|
|Selling Price per unit B||$50||$55||$60||$65|
|Total Sales (A*B)||$100,000||$121,000||$150,000||$195,000|
As the name suggests, in this type of budget, the company includes any addition that it plans or expects to go ahead. Let’s see an example of Incremental Budget:
Last year Company A paid a total salary of $500000. For the next year, the company plans to give an increment of 10% to the entire staff. Also, Company A plans to hire four new employees with a salary of $20000 each. Following is the Incremental Budget for Company A:
|Last Year’s Salary||$500,000|
|Expected 10% Hike||$50,000|
|New Hire (4 @ $25000 each)||$100,000|
|Total Salary Bill||$650,000|
Company A’s total salary budget for next year is $650,000.
Production budget depicts the number of units that a company expects to produce with a given amount of resources. It includes expected sales, inventory and more. Let’s see an example of Production Budget:
For the next four years, Company A expects to sell 10000, 12000, 14000 and 16000 units of the sale Cricket bats respectively. The closing inventory for the current year is 1000 units, but the production manager plans to bring it down to 800 units for next year and 750, 700 and 650 units for Year 2, Year 3 and Year 4, respectively. Following is the Production Budget for Company A:
|Particulars||Year 1||Year 2||Year 3||Year 4|
|Expected Sales Unit (A)||10000||12000||14000||16000|
|Opening Inventory (B)||1000||800||750||700|
|Closing Inventory (C)||800||750||700||650|
|Expected Production (A+C-B)||9800||11950||13950||15950|
This budget is not for any department, rather for the full business, and includes all sales, production, expenses and more. Let’s see a simple example of Business Budget:
Company B has sales of $500000. For the next year, the management expects sales to increase by 10%, while expenses (rent, insurance, Internet, travel, interest) by 10%. Cost of goods sold currently is $200000 and is expected to go up by 5%. Following is the Business Budget for Company B:
|Particulars||% Increase||Amt (Last Year)||Amt (Expected)|
|Total Expenses (C)||$24,000||$26,400|
|Net Income (A –B – C)||$276,000||$313,600|
Based on the above budget, net income for the Company B increases by $37,600.
Budgeting Examples – Approaches
We can also give budgeting examples on the basis of approaches to budgeting. There are two approaches to budgeting – Top-Down Approach and Bottom-up Approach.
First lets us understand the Top-Down Approach. Under this approach, the top management makes the budget after taking into account the goals and objectives of the organization. Management takes suggestions from managers, but they may or may not implement their suggestions.
Following is an example of the Top-Down Approach. Company A has set a target of selling 10000 units of mobiles next year. This is 2000 units more than last year. Since management sets the budget under the Top-Down Approach they were not aware of the last-minute machinery breakdown. Due to this breakdown, the production department will be unable to produce a given number of units. Such a situation could lead to clashes between the sales and production departments.
Now let’s understand the Bottom-up Approach. In this approach, managers prepare the budget for their department on the basis of past experience and available information. Thereafter, they submit it to the management for their suggestions and approval.
Following is an example of the Bottom-up Approach. The sales team of Company A has set a target of selling 10000 units of mobiles at $100 per unit. The production team, on the other hand, has set a target of producing 9000 units with the existing resources. Now, in this case, management will have to decide if it wants to go ahead with the sales target and give more resources to the production team. Or, go with the production team’s target and lose on extra revenue.1,2