Accounting or finance departments typically create budgets for companies based on historical financial data. While budgets sometimes are the source of tension in a company because operational managers do not like restrictions on spending, budgets help control expenditures and ensure the company does not create adverse cash-flow situations.
The expense budget usually relates to regular payments for items needed to run the business, such as utilities, materials and labor. Capital expenditures are large purchases a company makes throughout the year to improve facilities or replace equipment.
Business owners and managers may shift funds from one department to another during the budget process. Operational managers may be willing to lower budget amounts on certain expenditures so they can have higher spending limits elsewhere. Negotiations can be done before approaching the accounting department about the budget.
Failing to develop a budget can severely impact a company’s capital resources. Additionally, flaws from previous accounting periods can create a distorted budget for business expenses and capital expenditures. Companies must be able to accurately track cash flow so they can create workable budgets.