This article summarizes what an annual budget is and its importance for gaining insight into your next financial year. Defining the 3 major parts of an Annual budget: Revenue, Capital Expenditures and Operational Expenditures.
For any company, an annual budgeting process is critical in order to understand and gain insight on the company’s total revenue, operational and capital expenditures. An annual budget is a comprehensive summary of a company’s projected income and expenses for a 12-month period, these can be applied either to a fiscal or calendar year, depending on your company’s practices.
An annual budget is developed to include a balance sheet, income statement and cash flow statement, which is used to keep track of the financial activities for the year. For businesses like corporations, governments, and other organizations, annual budgets are critical for planning purposes with respect to sources of income and expenses like assets, liabilities, and equity; cashflows are used for reinvestments, debt management, or discretionary purposes.
Making an annual budget involves balancing an organization’s revenue or income with its expenses. A balanced budget is when revenues equal expenditures. The budget is in deficit if the revenue is less then its expenses, and it is in surplus if money is left over to be used for savings or expansion.
What is generally highlighted in an Annual Budget:
- Revenue, that is, how does the company generate income and where is the income coming from? Generally, income comes from the products or services the company sells, in some cases, companies can also generate income from royalties, interest, rent, fees, and dividends.
- Capital Expenditures (CAPEX), represents the company’s spending on physical assets like manufacturing plants, equipment, machinery, building maintenance, computers, vehicles, etc. These costs are major purchases that will be used beyond the current accounting period in which they are purchased. CAPEX are a company’s long-term expenses which depreciate over time.
- Operational Expenditures (OPEX), represent the costs a company incurs for running daily operations like rent, utilities, wages and salaries, accounting and legal fees, overhead costs, property taxes, business travel, interest paid on debt, etc. These costs represent the daily expenses designed to keep a company running. OPEX are a company’s short-term expenses.
It is important that the Company consults all departments in the annual budgeting process ensuring it is not completed behind closed doors by the accounting or finance team. It is crucial to incorporate feedback from each department to confirm that the results are as accurate as possible.
This beneficial process brings important foresight into the next financial year and makes for more efficient decision making. Doing the research and making sure the proper information is gathered and fact checked will be well worth the investment.