Budgeting is an essential financial management tool that any business needs to be successful. Typically, companies prepare annual budgets before the fiscal year begins. This window of preparation helps facilitate execution.

It involves the process of preparing and forecasting financial statements by estimating future revenues, cost of sales, operating expenses, and capital expenditures. Budgeting helps businesses to predict performance and ensure efficient resource allocation.

The key components of a financial budget include:

• Projected Income Statement:  Sometimes referred to as a profit and loss statement (P&L), details your company’s estimated revenues, expenses, and profits or losses over the budgeted period to evaluate expected future performance.
• Projected Statement of Financial Position:  Sometimes referred to as a Balance Sheet, is a financial report that presents the estimated value of a company’s assets, liabilities, and equity at a particular time in the foreseeable future. It is created using the previous year’s report as the base year and takes into account movement in all of the balance sheet items that are projected to occur during the budgeting phase.
• Projected cash flow statement:  This is a detailed projection of cash inflows and outflows prepared by analyzing operating, investing, and financing activities to evaluate the company’s projected cash position, financial performance, obligations, and growth opportunities.

A budget should be seen as a set of guidelines, not rules, based on the best forecasts at the time but should always be open to amendment as circumstances warrant.