Every business and organization needs to create budgets to account for its upcoming expenses and determine how to use its revenue. Budgets can take a number of forms based on the organization's needs and financial situation. Two common types of budgets are operating budgets and financial budgets. While these two documents share some key information, they have different uses within an organization.
Operating Budget Definition
An operating budget covers a set period of time and lists an organization's planned revenue and expenses over that time frame. An operating budget includes three major sections: expenses, revenue and profits. The profit section combines expected revenue from all sources with budgeted expenses to determine whether the business will earn a profit or experience a loss over the budget period.
Financial Budget Definition
A financial budget includes information about how a business will go about acquiring cash in the future and how it will spend that cash across the same time frame. One of the major sections of a financial budget is a cash budget, which outlines upcoming cash expenses and earmarks incoming cash to cover it. A capital expenditure budget is another section of a financial budget that deals with major upcoming expenses, such as new buildings for expansion.
Similarities and Differences
Both operating budgets and financial budgets rely on the same expectations when it comes to revenue. In each case, an organization's financial leaders use past performance and market trends to determine the upcoming sales, investment revenue and income from selling off assets according to a budgeted plan.
Organizational budgets, however, balance that revenue against upcoming expenses, while a financial budget seeks ways to spend some or all of the revenue. A financial budget also includes a balance sheet, which notes the organization's assets and liabilities at a given point in time, independent of its revenue or projected expenses.
Operating budgets and financial budgets are useful in different scenarios because of their systematic differences. For example, when a business wants to know where to make money-saving cuts, it can refer to the discretionary spending in its operating budget. Businesses also use operating budgets to determine how much money to allocate to special projects. Financial budgets help businesses work toward long-term goals. They also are useful for financial investors, who need to gauge the business's health and understand its financial position relative to competitors.
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