Company's Financial Accounting
Income and Expenditure Budget: Definition and Template
What is this budget and how to create it?
Definition: This type of budget is a plan of income and expenses of the enterprise for a certain period of time (budgeting period), which reflects the financial result of the company. It is compiled depending on the list or nomenclature of the planned revenues and expenses of the company, on an accrual basis, in other words, upon completion of a business transaction, regardless of the actual time of cash receipts and payments.
The budget of income and expenses (in Finnish, kustannusbudjetti), or as it is called the budget of profits and losses, is an effective tool for planning and monitoring the activities of the organization. With the help of this budget, the company management has the opportunity to:
- estimate future profit and factors influencing its change compared to the previous reporting period;
- understand which company’s products or services are most and least profitable;
- determine the effect of prices and different kinds of discounts, as well as sales volume on the financial result of the company;
- control and analyze the planned costs and the needs to reduce them;
- analyze the budget in the context of products, distribution channels, customers, regions, divisions, etc.
The principle of income and expenditure budgeting consists in sequentially subtracting various items of expenses from the planned income of the enterprise. This can be either a calculation for the company as a whole or separately for products, for regions and branches. Herewith, the income and expenses budgeting by products will allow to evaluate the economic efficiency of the production and sale of a particular product line, as well as establish a certain pricing and product assortment policy of the company. Calculation of indicators in the context of regional subdivisions and branches (structural units) allows to evaluate the effectiveness of their work, track and control its dynamics. As a rule, the revenue part of the budget of income and expenses is formed on the basis of the sales budget, the expense part is formed on the basis of variable and fixed costs. The expenditure side of the budget may contain such cost items as:
- production costs;
- transport charges;
- business expenses;
- management expenses;
- labor costs;
- payment of taxes;
- loan repayments and interest thereon;
- other operating expense.
All possible expenses of the company should be collected in this budget, but if some expenses are not taken into account, then the information contained in the budget of income and expenditure will not reflect the real situation at the enterprise.
Based on the data of the budget of income and expenses, it is possible to make calculations of the following types of profit:
- gross profit , which is an indicator of the success of any company;
- contribution margin, which reflects the effectiveness of sales and used to determine the feasibility of the production of certain product;
- operating profit or EBIT, shows the effectiveness of the main activity of the enterprise;
- profit before taxes, demonstrates the profitability of the company, taking into account the profit earned before taxes;
- and net profit.
However, the key indicators here will be the data on net profit and return on sales.
Net profit is one of the main indicators of financial analysis of the enterprise, which shows the amount of money company have left over after deducting all costs and taxes.
Net profit = Revenue - Cost of goods - Administrative expenses - Business expenses - Other expenses – Taxes
Return on sales (ROS) is an indicator reflecting the sales efficiency of an enterprise, showing what percentage of the organization’s revenue is turned into profit, i.e. share of net profit in total sales. Calculation can be made using various profit indicators:
Gross profit margin = Gross profit / Revenue
Return on sales (ROS) or EBIT margin = EBIT / Revenue
Net profit margin = Net profit / Revenue
When interpreting the budget data, the specifics of the business should be taken into account. So, in some months, financial indicators may show a loss-making business, however, they may reflect good profit and profitability for the total year in general. This situation may be typical, for example, for seasonal goods. As a rule, such a budget will be approved by the company’s management if the planned annual profitability indicators turn out to be quite good, despite losses in some separate months.
Income and Expenditure Budget, free download template in Excel format
English, Russian and Finnish versions
| Name | File to download |
|---|---|
| Income and Expenditure Budget | DOWNLOAD FREE |
| Бюджет доходов и расходов | СКАЧАТЬ БЕСПЛАТНО |
| Kustannusbudjetti | LATAA ILMAISEKSI |