Flexible (Expense) Budget
The flexible (expense) budget is most commonly used by companies. It allows for variability in the business and for unexpected changes. It is dynamic in nature rather than static. Flexible budgets adjust budget allowances to the actual activity. Flexible budgets are effective when volumes vary within a relatively narrow range. They are easy to prepare with computerized spreadsheets such as Excel. The four basic steps in preparing a flexible (expense) budget are:
1. Determine the relevant range over which activity is expected to fluctuate during the coming period.
2. Analyze costs that will be incurred over the relevant range in terms of determining cost behavior patterns (variable, fixed, or mixed).
3. Separate costs by behavior, determining the formula for variable and mixed costs.
4. Using the formula for the variable portion of the costs, prepare a budget showing what costs will be incurred at various points throughout the relevant range.
Due to uncertainties inherent in planning, three forecasts may be projected: one at an optimistic level, one at a pessimistic or extremely conservative level, and one at a balanced, in-between level.
Capital Expenditure Budget
The capital expenditure budget is a listing of important long-term projects to be undertaken and capital (fixed assets such as plant and equipment) to be acquired. The estimated cost of the project and the timing of the capital expenditures are enumerated along with how the capital assets are to be financed. The budgeting period is typically for 3 to 10 years. A capital projects committee, which is typically separate from the budget committee, may be created solely for capital budgeting purposes.
The capital expenditures budget often classifies individual projects by objective, as for
? Expansion and enhancement of existing product lines
? Cost reduction and replacement
? Development of new products
? Health and safety expenditures
The lack of funds may prevent attractive potential projects from being approved.
An approval of a capital project typically means approval of the project in principle. However, final approval is not automatic. To obtain final approval, a special authorization request is prepared for the project, spelling out the proposal in more detail. The authorization requests may be approved at various managerial levels depending on their nature and dollar magnitude.
Programming is deciding on the programs to be funded and by how much. A common application of program budgets is to product lines. Resources are allocated to accomplish a specific objective with a review of existing and new programs. Some suitable program activities include research and development, marketing, training, preventive maintenance, engineering, and public relations. Funds usually are allocated based on cost effectiveness. In budget negotiations, proposed budgetary figures should be explained and justified. The program budget typically cannot be used for control purposes because the costs shown cannot ordinarily be related to the responsibilities of specific individuals.
Depending on needs and convenience, budgets can be classified as incremental, add-on, supplemental, bracket, stretch, strategic, activity-based, target, and/or continuous.
Incremental budgeting looks at the increase in the budget in terms of dollars or percentages without considering the whole accumulated body of the budget.
There are also self-contained, self-justified increments of projects. Each one specifies resource utilization and expected benefits. A project may be segregated into one or more increments. Additional increments are required to complete the project. Manpower and resources are assigned to each increment.
An add-on budget is one in which previous years' budgets are examined and adjusted for current information, such as inflation and employee raises. Money is added to the budget to satisfy the new requirements. With add-on, there is no incentive for efficiency, but competition forces one to look for new, better ways of doing things. For example, Konica Imaging U.S.A. has combined add-on with zero-based review.
Supplemental budgets provide additional funding for an area not included in the regular budget.
A bracket budget is a contingency plan where costs are projected at higher and lower levels than the base amount. Sales are then forecasted for these levels. The purpose of this method is that if the base budget and the resulting sales forecast is not achieved, the bracket budget provides management with a sense of earnings impact and a contingency expense plan. A contingency budget may be appropriate when there are downside risks that should be planned for, such as a sharp drop in revenue.
A stretch budget may be considered a contingency budget on the optimistic side. Typically it is only confined to sales and marketing projections that are higher than estimates. It is rarely applied to expenses. Stretch targets may be held informally without making operating units accountable for them. Alternatively, stretch targets may be official estimates for sales/marketing personnel. Expenses may be estimated at the standard budget sales target.
Strategic budgeting integrates strategic planning and budgeting control. It is effective under conditions of uncertainty and instability.
Activity-based budgeting budgets costs for individual activities.
A target budget is a plan in which categories of major expenditures are matched to company goals. The emphasis is on formulating methods of project funding to move the company forward. There must be strict justification for large dollars and special project requests.
Continuous (Rolling) Budget
A continuous (rolling) budget is one that is revised on a regular (continuous) basis. Typically, a company extends such a budget for another month or quarter in accordance with new data as the current month or quarter ends. For example, if the budget is for 12 months, a budget for the next 12 months will be available continuously as each month ends. Note: Fixed budgets are criticized as being ineffective in a rapidly changing world. Companies report performance on a calendar basis, but floods, stock market crashes, strikes, and a competitor's new product announcement, happen continuously. In consequence, some leading companies have abandoned fixed budgets and changed to rolling forecasts to inspire and lead their companies to better performance. Rolling forecasts direct management's attention towards the future, and ensure that planning is ongoing, as opposed to an annual exercise.