A budget, or your company's monetary action plan, helps you to assess the adequacy of financing for the budget period. A budget period is usually the length of the accounting period, and is often divided into quarterly or monthly budgets. In addition to an annual budget, you can prepare a medium-term budget for 2–3 years and a long-term budget for 3–10 years for your company. Budgeting is started with the preparation of sub-budgets. After this, master budgets, or collective budgets are prepared and, if necessary, revised and supplemented to comply with the goals set. Finally, the corporate management must approve the budget.
There are various methods that can be applied to compiling a budget:
A fixed budget is prepared before the beginning of an accounting period, to cover the entire financial period.
In a performance-based budget, revisions are made during the accounting period to enable better adaptation to external changes.
A rolling budget is best suited to companies operating in volatile markets. With a rolling budget, the end of the budgeted period is postponed so that, after each month or quarter, a new month or quarter is included in the budget.
A flexible budget adjusts for changes in the volume of activity. Fixed costs are budgeted at standard rates, whereas variable costs depend on the actual volume of activity.