Operational and Financial Budgeting Budget

Operational and Financial Budgeting Budget Budgeting: Operational and financial budgeting and forecasting Budgeting: Operational and financial budgeting and forecasting An operational budget provides an estimate of a business' likely expenses and income, based upon projected sales revenue for a given period of time. The process of constructing an operating budget involves tabulating a series of sub-budgets, the most important of which is the sales budget, which is always prepared first (Operating budget, 2010, Business Dictionary). Unlike a financial budget, the operational budget is a short-term budget and excludes capital outlays.

A financial budget, in contrast, involves computing a budgeted balance sheet that indicates the effects of planned operations and capital investments on the organization's assets, liabilities, and equities (Financial budget, 2010, Accounting Dictionary). The two different types of budgets have two different intended purposes and audiences.

"While the operating budget deals with the costs for merchandise or services produced," and is of greater interest for the internal, day-to-day functionaries involved with the firm, because "the financial budget examines the expected assets, liabilities, and stockholders' equity of the business," the financial budget is of greater interest to shareholders and other investors when evaluating the company's long-term financial health (Different types of budgets, 2009, Types of budgets).

The balanced budget sheet is particularly critical because it projects a company's financial position, discloses potentially negative financial conditions or obligations that the management will take steps to address, highlights future opportunities, and acts as a "check on the mathematical accuracy of all other budgets" (Balanced budget sheet, 2010, Accounting Dictionary). However, no financial forecasting is perfect, and it is essential that a variety of future projected scenarios and contingency plans are made.

For example, a rapid increase in sales will bring in new revenue to the firm, but will also require larger outlays in terms of the costs of production of raw materials, labor, and overhead. The marginal costs of the additional growth must be determined. Marginal costs are the additional costs of producing each additional unit and tend to rise as the scope of production increases.

Economic equilibrium is achieved when the marginal benefits derived from sales and the marginal costs of production are the same: the firm must balance the costs of increasing production with the benefits derived from the additional sales (Marginal analysis, 2010, Economics 104). While additional sales might be classified as a relatively 'happy' change in circumstances, budget overruns are a more common unexpected occurrence. Budget overruns can occur for a number of reasons -- unforeseen technological or weather problems, bureaucratic red tape and delays, or a sudden rise in input costs.

To ensure that such excesses are allowed for, it is a good idea to have as realistic a view as possible of the overall project, and plan for the possibility of cost overruns. For example, budget overruns are endemic to certain professions, such as the defense industry and construction, and it would be unrealistic to assume that every project will meet its budget target in these industries. When forecasting, the likelihood of overruns should be assessed, using similar projects in the past as a point of comparison.

Approval of overruns is more likely if the excesses are planned for and shown to be due to external environmental changes, rather than rooted in the incompetence of the project manager. But no matter how inevitable cost overruns may be, it is still essential.