How to Prepare a Budget for a Corporation

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  • 0:02 Building a Budget
  • 0:54 Planning the Budget
  • 2:36 Getting Feedback
  • 3:25 Updating and Issuing…
  • 3:47 Make Preparations for…
  • 4:12 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Budgets are some of the most important documents that a company will produce. In this lesson, we'll learn how to prepare a budget for a corporation, starting by planning the budget and ending with distribution.

Building a Budget

Let's face it. When many people hear the word 'budget,' they shudder. Suddenly, they think of ignoring their urges to shop, eat out, or really do anything fun. However, for a business (and individuals as well), a budget doesn't have to be a scary thing. In fact, many companies consider budgets an essential part of the planning that goes into doing business.

Remember that for a company, a budget is not just about money. Instead, a budget is an anticipation about the total number of goods or services to be produced and sold, as well as the costs and income that come with them. Companies have several budgets, but we'll refer to them collectively as 'the budget' here. In this lesson, we'll learn how to prepare a few types of budgets for a company, using the example of a widget factory to help us through.

Planning the Budget

First things first - in order to make a budget, you have to look at the environment that you are budgeting for. A great place to start with this is the last year's budget, but if you don't have one of those handy, draw up a quick draft and update it accordingly. Be sure to include sections for your total income, total costs, total goods produced, and total goods sold. In fact, these sections should help inform the others.

Let's say that you're drawing up the budget for a small widget factory. The factory is new, so you don't have anything to go by. However, you do know you have salespeople who are confident that they will sell a million widgets. That estimate is the first part of your sales budget, the first budget that is prepared by a company every year. A sales budget includes information about how many units you expect to sell, the price per unit, and the total income after adjustments for discounts. You then multiply the number of widgets by the sales price to get the total revenue you expect to generate.

From there, you'll take the total number of widgets you expect to sell and calculate the production costs for them. Remember that you can get the total number of goods you'll need to produce from the production budget, which contains the forecasted unit sales along with information about finished goods inventory at the beginning of the period. This will show you how many widgets you need to manufacture.

Finally, you'll want to make sure that the company has plans to pay you, right? To solve that, we create the administrative budget, which shows the costs for any non-production overhead. Items on this budget include salaries for workers (such as accountants and managers) along with other expenses for items like rent, utilities, depreciation on office equipment, and payroll taxes.

Getting Feedback

Next, send your budgets to the relevant heads of each department. Ask them for feedback. This is not the time to be a yes-man. Instead, you want honest feedback on the chances of hitting your described numbers. Additionally, ask your managers if there is anything that can be done to increase overall productivity. In other words, if a new machine can help you make widgets faster with less waste, this is the time to recommend it!

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