Business Budgeting for Beginners

In this lesson, you'll begin to look at various budgeting strategies, including strategic, capital, and operations budgeting techniques. The lesson will include some real-life examples of planning activities, and to further bring these concepts to life, you'll work with a fictional company, Curly's Pool Service and Supplies, by helping Curly formulate some plans and budgets!

This lesson will focus all on sales, specifically the role that sales play in the budgeting process. We'll examine the best practices for compiling a sales forecast and how to increase the chances that the sales forecast will actually mimic real life. We'll also discover how to create an inventory that needs a budget to determine just how much inventory to purchase based on a sales forecast. Finally, we'll discuss how to formulate a labor requirements budget to accurately project just how much labor you may need to employ to meet the needs of the company, again based on the sales forecast.

In this lesson, we are going to detour a bit from the actual preparation of a budget and dive into how certain types of costs behave. Understanding how costs increase or decrease relative to an activity is an essential part of learning how to accurately budget for costs in a business. So, in the upcoming chapters, you're going to discover how to distinguish between variable, fixed, and mixed costs. We will use these cost types to calculate the contribution margin for the business. Then, we will show you how to use contribution margin to make certain predictions and decisions in a business. Most notably, you'll see how to use contribution margin to calculate the all-important break-even point and margin of safety for a business.

This lesson will be a continuation of the discussion about cost behavior. In the lesson, you'll explore how to evaluate a company's sales mix and how to calculate operating leverage using tools given throughout the course. Operating leverage is just another key component of cost analysis that will allow you to, once again, easily make projections about the future. We'll end the lesson with a discussion about how companies set prices for the products and services they offer. You can probably guess that this process is a bit more involved than just selecting a price out of thin air. It's actually an essential part of a company's overall budgeting process and should not be taken lightly.

In this lesson, we'll examine the steps needed to build both a direct materials budget and a direct labor budget. We'll also examine how a manufacturing company budgets for manufacturing overhead. All of these components are key to developing an overall production budget for a business that manufactures a product. Finally, we will end this lesson by describing the components of a production budget.

In this lesson, we'll discuss how to prepare a complete cash budget for a business. You'll get the chance to take an even closer look at how a company might forecast cash collections from credit sales and cash payments on credit purchases for big-ticket items like inventory or other expensive capital projects. We'll even take a look at how some companies mitigate the risk of running out of cash by utilizing lines of credit and other sources of cash instead of just relying on cash generated from sales.

In this lesson, you'll learn some of the basic methodologies that can be applied in many different capital budgeting scenarios. The lesson will begin with an explanation of a technique that does not include an evaluation of how time impacts the valuation of money. Then, you'll learn how the passage of time and its impact on the value of a dollar is incorporated into capital budgeting decisions. Since capital projects often span years, or even decades in some cases, the time value of money is key to improving accuracy in budgeting for capital projects. The lesson will finish up with a thorough review of, perhaps, the most common technique that is used in capital budgeting decisions: net present value.

In this lesson and the one that follows, we're going to explore how businesses use budgeted data in combination with a formalized decision-making process to improve their chances of making better decisions. For a business, a better decision is one that maximizes profit and aligns with the company's goals and values. We'll start with an examination of what types of budgeted information are relevant to making a decision and what types of information you can ignore. You'll see the differences between quantitative and qualitative information and how each can be used to improve decision-making. Then we'll finish up with an example including some specific steps you can use as a model for making better decisions.

In this lesson, you'll continue to practice with these same techniques by applying them to a few other common business decisions. You'll start by examining how a business uses budgeted information to make the choice to replace an existing asset with a new asset, such as replacing an old piece of manufacturing equipment with a brand-new one. Next, you'll explore how a business might use budgeted information when deciding whether to eliminate a product or service that it offers. We'll finish up the lesson by examining one of the most critical business decisions you'll ever need to make: how to allocate your most scarce resource to maximize profit in your business.

In this lesson and the one that follows, we will focus on how best to evaluate the financial stability and performance of the business using budgeted information. We'll start by taking a close look at using the components of a company's operating budget to compile the pro forma balance sheet. Next, we'll examine the steps needed to prepare the pro forma income statement, again by using the information found in many of the other operating budget components. To finish up the lesson, we'll dive into some straightforward techniques that are useful to evaluate the balances found on the pro forma balance sheet and income statements.

In our last lesson, we'll spend more time on the budget evaluation process by examining how companies use variance analysis to evaluate differences between actual results and the budget. To keep things manageable, we'll stick to the basics here so that you're equipped with some tools to take with you when applying these techniques in a real company. As part of this process, we'll take a look at how budget variances are defined and interpreted. Then, we'll discuss some techniques like flexible budgeting to evaluate and isolate certain budget fluctuations in a way that provides clarity to a business owner or manager. We'll finish up the lesson with a brief discussion of the budgetary control process and the soft skills needed for this process.