Types of Business Budgets: Explore Varieties and Strategies

9 Types of Business Budgets, Learn Which to Choose!

Types of Business Budgets: Explore Varieties and Strategies

With so many types of budgets available, it’s common to wonder which one is most suitable for your business.

First of all, it’s important to understand that a business budget is a vital tool that meticulously outlines a company’s expenses and revenues over a specific period.

And besides just relying on past data, creating a business budget involves a critical analysis of the company’s current situation, market outlook, and established goals.

This allows for future projections aligned with financial and strategic goals, enabling managers to understand aspects like return on investment (ROI), future financial commitments, and opportunities.

So, to help you better understand the different types of this business tool, we’ve prepared this article in which we clarify what a budget is, along with examples, features, and applications.

This way, it will be easier to choose the most suitable one for your organization’s needs and goals. Shall we get started?

What are business budgets?

A business budget is a tool or document that meticulously describes all of a business’s expenses and revenues over a specific period, usually over the course of a year.

And rather than relying solely on past data, creating a business budget includes a critical analysis of the company’s current situation, market prospects, and established organizational goals.

Thus, the data collected covers both the company’s costs and earnings, allowing for future projections aligned with financial goals.

In this way, this approach, integrated with financial planning, enables managers to understand aspects such as return on investment (ROI), future financial commitments, and potential business opportunities.

How to create a budget for my business?

Below, we highlight nine important steps on how to create a budget for your business. Check it out!

Create a financial diagnosis

The first step in creating a budget for a business is to conduct a comprehensive analysis of the company’s financial condition. This involves gathering information and expense reports from previous periods.

List objectives and goals

Define objectives and goals for the budget, as well as establish measurement criteria to assess how well these objectives are met. At this stage, consider priorities that could benefit the business, such as investments in new areas, hiring staff, or implementing new technologies.

Make a projection based on data

Prepare a sales projection based on historical data, avoiding unrealistic expectations. To do this, analyze past sales history and consider industry characteristics.

Estimate revenues

Besides sales revenues, include other sources of income, such as external investments. Listing and estimating revenues here helps provide a realistic view of the company’s future.

Detail costs and expenses

Identify and analyze all costs and expenses, involving those responsible for each area in defining what is essential. Additionally, revisit spending from the previous period to identify opportunities for reducing unnecessary expenses.

Plan your investments

Include the necessary investments for the company’s expansion or operational upgrades in the budget. Keep in mind that failing to include these investments can jeopardize financial resources and the net margin.

Include key performance indicators

Conduct a thorough analysis of financial KPIs, such as contribution margin and gross margin. These indicators help with product or service pricing and provide more accurate simulations.

Facilitate consultation and communication

Efficiently communicate the budget details to employees through memos, newsletters, or emails. Effective internal communication enables quick responses to purchasing or service requests, and helps the team understand limitations and seek innovative solutions.

Review and monitor

Constantly monitor the chosen budget to avoid outdated figures and ensure proper spending control. Monitoring helps avoid waste, whether by reducing costs for business trips or service provision.

The 9 Main Types of Business Budgets

Now, let’s take a closer look at the main types of business budgets.

Adjusted Budget

Among the types of budgets, we have the adjusted budget, also known as a forecast, which involves constantly monitoring the budget, allowing for changes as planning needs arise.

This means that with this model, in cases of unforeseen expenses, such as an increase in raw material costs, the rest of the budget can be adjusted according to the company’s goals.

Zero-Based Budget

Zero-based budgeting is a model that proposes defining the business budget for the next year without considering the previous year.

Although a historical analysis can be conducted to identify specific patterns, this budget is prepared based on market analysis and trend studies.

Collaborative Budget

The Collaborative Budget, also referred to as Decentralized or Participatory Budget, aims to decentralize the budget planning process by involving more people in the decisions.

Unlike the approach where the budget is set solely by senior management, this type of budget includes the active participation of department managers.

Continuous Budget

The continuous budget, also known as rolling forecast, differs from the adjusted model in that it covers the period from January to December, but after the first month, a new plan is drawn up for the subsequent 12 months.

Strategic Budget

The strategic budget sets the framework for developing the annual budget to reduce risks and guide the company toward more effective decision-making.

It considers different scenarios, debating potential solutions for various situations that may arise.

Static Budget

The static budget is characterized by the absence of changes to the budget until the end of its period.

It’s commonly used in public budgets of governmental companies that follow bureaucratic processes and adhere strictly to their budget.

Flexible Budget

The flexible budget allows for adjustments based on production or sales volumes. In situations of increased sales, for example, it’s possible to allocate more resources proportionally.

Incremental Budget

Unlike zero-based budgeting, the incremental budget is based on historical data and previous periods’ analyses.

It’s a quicker approach to budget development as it doesn’t require detailed information for each area.

Matrix Budget

The matrix budget, also known as OMD (Operational Management Design), is developed based on expense approval and ensures stricter control over company spending.

How to Choose the Ideal Budget? 4 Important Points

Now that you know the main types of budgets, it’s time to understand the four key points of a budget:

Revenue and Sales

Evaluate sales history and future projections.

Consider seasonality and market trends.

Keep realistic growth goals in mind.

Use market data and competitive analysis to back revenue estimates.

Profitability

Analyze desired profit margins and those historically achieved.

Consider factors impacting profitability, such as variable costs and operational expenses.

Define strategies to optimize profitability.

Costs

Identify and classify all operational costs.

Assess the possibility of reducing costs without compromising quality.

Capital Investment

Evaluate investment projects in fixed assets.

Consider the useful life and depreciation of assets.

4 Reasons to Automate the Budget

It’s no surprise that automation is a lasting trend, applicable in various business areas, from human resources to corporate budgeting.

Investing in a tool that can automate different types of business budgets is a smart choice, as it offers numerous benefits, including:

Increased productivity

Automation eliminates bureaucratic tasks, allowing management to focus on more strategic activities.

Risk reduction

Automation serves as a security ally, decreasing the likelihood of errors.

Greater accuracy

With the right tool, it’s possible to obtain more reliable figures.

Strategic alignment

Automation enables the company to develop more accurate strategies aligned with business goals.

Mitra is a comprehensive solution for boosting operational efficiency and excellence in your organization. Discover it now.

Conclusion

By exploring the nine types of business budgets and understanding the nuances of each approach, your company can make more informed and strategic financial planning decisions.

As discussed in this article, each type of budget has specific advantages and considerations.

It’s crucial to align the choice of budget with your company’s strategic goals and the market conditions it operates in.

Additionally, carefully evaluating the four key points – revenue and sales, profitability, costs, and capital investment – provides a solid foundation for selecting the most appropriate budget.

Moreover, automating the budgeting process is a valuable tool, regardless of which type of budget you choose.

It increases productivity, reduces risks, improves accuracy, and aligns strategies.

Investing in automated solutions optimizes efficiency and allows management to focus on strategic initiatives, driving long-term business success. For that, count on Mitra!