Budgets and Reports

01/09/2020 0 By indiafreenotes

A budget report is an internal report used by management to compare the estimated, budgeted projections with the actual performance number achieved during a period. In other words, a budget report is designed to compare how close the budgeted performance was to the actual performance during an accounting period.

What Does Budget Report Mean?

Since budgets are financial goals based on estimates and future projections, they are often inaccurate and can differ largely from the actual financial performance of a company. During an accounting period managers often compare the budgeted numbers that were prepared at the beginning of the period to the actual numbers they are incurring. This serves two main purposes.

Example

First, managers can correct problems occurring in the business to make the performance more inline with the financial goals in the budget. Second, they can evaluate how realistic and accurate their predictions were. If their predictions were way off during the period, they can adjust their next budget accordingly.

The budget report is used to compare both sets of data. An example budget report typically follows the same formatting as an income statement. The sales and revenues are listed first followed by the cost of goods sold, selling expenses, general and administrative expenses, other expenses, and finally a net operating income number.

There are usually two columns listed side by side for the budgeted numbers and the actual performance results for the period. Often there is a third column added to list the variances. Favorable variances occur when the actual numbers are better than the budgeted numbers. These are marked with an F in the margin.

Unfavorable variable are just the opposite. When actual numbers are worse than budgeted number, a U written in the margin identifying the poor results in that area. Depending on the operation, manager, and company these budgets can be reviewed on a monthly, weekly, or even daily basis.

A Budget Report’s Content and Sections

A company’s budget report will have different sections depending on its financial needs and the data available for the business. Common sections include:

  • General income and sales information,
  • The fixed and flexible expenses that are necessary for the business to operate to full potential, and
  • The net worth of the entire company, including assets and liabilities.

More extensive budget reports might also include a letter from the company owner about any major financial changes in the company during the reporting period, and predictions for the future.

It’s important to recognize that there’s a difference between financial reporting and financial statements. A budget and similar financial reports are useful tools, but that’s all they are. Financial statements make more formal representations of a company’s value, and must meet specific legal and regulatory standards.

Types of Budget Reports

Budget reports or financial reports are written and created based on the needs of the business. A smaller business with a modest level of annual sales may only require a single financial year budget. However, a larger business with several hundred sales per day may need a budget report several times a year, also called quarterly reports. Keeping track of the finances and budgets makes it easier to compose the annual report for the business.

Readers and Usage of Budget Reports

The business owner and company executives are the common readers of the budget report. They use the information internally to create financial plans and projects that suit the limits of the budget in hopes of creating a larger annual profit. Growth and expansion are often the general goal with a budget report, though the opposite can be true in hard times. For example managers in departments with projected growth might hire additional staff, while others who face cuts to their operating budget might need to freeze hiring or even let staff go.

Budget reports are also read by outsiders, such as stockholders and investors. Investors and stockholders are interested in how a business is operating and doing financially before making any large decisions. It’s also a useful tool for evaluating the company’s management: If the company’s real-world results are consistently different from the budget’s projections, it reflects poorly on their decision-making and analytical skills.