What Is a Purchases Budget?

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Man checking warehouse inventory
Man checking warehouse inventory (Image: monkeybusinessimages/iStock/Getty Images)

A purchases budget report allows business owners to determine how much money and goods are needed to reach desired goals. This particular budget is used for companies that have products in stock or inventory, as the value of inventory plays a large role in a complete purchases budget.

Calculating Purchase Budget

A purchases budget provides a representation of what the business plans to buy for the inventory and how much inventory it plans to grow or hold over a given period of time. The budget is created using a simple formula: the desired ending inventory, plus the cost of goods sold, minus the value of the beginning inventory. This equation gives you the total purchases budget. For example, if you want $10,000 in ending inventory and your cost of goods sold is around $3,000, add these two values and subtract the value of your beginning inventory from the $13,000 total. If the value of the beginning inventory is $2,000, for example, the amount if your total budget is $11,000.

Cost of Goods Sold

The cost of goods sold is a collected sum of all products or services offered by the company in terms of the production value. The sum is a total of products costs plus the means to get it ready for sale. Some companies even break it down and explain how the cost is divided in terms of planning, production and testing, for example.

Purchases Budget Purpose

A purchases budget is created to keep track of the company's inventory value and the amount of goods sold. It also is used to help you keep track of your desired ending inventory value each month. The purchases budget is often just a partial budget for a business and is often found in a business master budget.

Planning

The specificity of the purchases budget allows business owners to use the information to plan the inventory. The purchases budget is often a single component of a larger inventory and purchase budget for a business, as this particular budget focuses on the value and growth of inventory. It also helps plan for future purchases of goods.

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