Basics of Budgeting and Financial Management

Businesses obviously can't be run well without budgeting and financial management. If you're looking to learn more about how a business sets up a budget and manages money, here are the basics.

First, there are two kinds of operating budgets. The first is a sales budget, which is basically a motivational tool, stating how many sales your company or department hopes to achieve. Expense budgets cover operational costs. It is easier to cut an expense budget than up the figures of a sales budget, which can be unfortunate for employees. Discretionary items like travel, office parties, furniture, and staff perquisites can easily be cut to increase a profit margin.

Each department in a company usually has a budget, in addition to a company budget. Cash flow reports, which compare the beginning total of assets for the present year and the beginning totals for the previous year, can help you see if a company is making progress. Budgets are tracked by accounting reports, which also comes in two types: a balance sheet and an income statement (which measures profits and losses).

Simply, a balance sheet has two columns. The left column lists assets like checking accounts, money market accounts and accounts receivable. The right column lists current liabilities, like accounts payable, payroll taxes, and owners equity (earnings and stock). The idea is that the totals for both columns are equal: assets = liabilities + owners equity. If you are looking only at balance sheets to see how a business is doing, you will need to see at least two to get an accurate picture.

An income statement gives an itemized list of income sources for a given period, usually a year. It also provides an itemized list of expenses for the time period. At the bottom of the sheet, the expense total is subtracted from the income total to acquire the net profit. The net profit is the famous "bottom line". If it's a positive number, the company is "in the black" and doing fine. If it is a negative number, the company is "in the red" and lost money.