What is a Financial Budget?

Financial budgets are financial plans that are structured to detail projections on incomes and expenses on both a long-term and a short-term basis. Budgets of this type normally incorporate aspects of other types of budgeting strategies, including the preparation of a detailed budgeted balance sheet, a section that functions as a cash flow budget and addresses the receipt of income and the flow of expenses on an annual, semi-annual, and a monthly basis. It typically covers a period of at least one year, although it is not unusual for some organizations to prepare this kind of budget to cover anywhere from two to five years at a time.

There are a number of advantages associated with a well-crafted financial budget. One has to do with the process of setting short-term and long-term goals for the organization. Assuming that the information used to create the budget is accurate, the document serves as a blueprint for operations from month to month, while still making it possible to consider the long-term advantages of staying within that budget. From this perspective, it becomes a powerful tool for measuring how well the organization is doing with meeting its long-term financial goals, and being able to periodically report those findings to shareholders or organization members in a timely manner.

A properly prepared budget can also make it much easier to adjust the financial operation of a business or other entity when unforeseen changes in income or expenses occur. Rather than simply reacting to a change in the price of raw materials or a loss of income due to some circumstance outside the control of the organization, the very structure of the plan calls for considering courses of action, plugging those courses into the structure of the budget, and projecting the impact each action would have on the long-term financial well-being of the operation of the organization. Here, the budget becomes a means of considering different scenarios and identifying the ones with the highest probability of dealing effectively with changes and still reaching the ultimate financial goals.

Under the best of circumstances, a financial budget provides a stable road map to the future that allows an organization to adequately address all aspects of the operation, rather than focusing just on financial matters. This can be very important when there is a need to focus on customer care, improving the efficiency in a production or manufacturing setting, or creating a viable marketing plan. Assuming that the budget is comprehensive and helps to set parameters for each area of the operation, there is usually little need to make adjustments in budget line items. The end result is an organization with a healthy bottom line, a highly functional operating structure, and a clear understanding of how it will reach its goals over the next several years.