How to prepare a budget

How to prepare a budget

Andrea Pokorny writes about money and home management at MainstreamMom.com. She has been published in Reader’s Digest and contributes to websites like EverythingMom.com. She is passionate about delivering tools and resources to help women everywhere with the toughest job on the planet as mothers.

Creating an effective budget that lasts can be a challenge. Let’s face it. Budgets can be exhausting and intimidating and they require a lot of attention. Much like our kids.

The big difference? Budgets won’t tell you they’re hungry, tired or need to go the bathroom. They won’t poke at you while you’re trying to have a conversation on the phone. Budgets don’t ask for attention.

But that doesn’t mean a budget isn’t an important part of the family. In fact, a budget is an essential component of a family’s healthy financial plan.

Don’t give up on your budget. Reap the rewards:

  • Achieve your goals
  • Improve financial communication in your marriage
  • Get control of your finances and tell your money where to go

You can find contentment on any income and you will be well served to live on a budget. Your budget is the rock upon which your financial life is built. Think of it as your foundation. It’s your plan for spontaneity. Your plan for the unplanned financial roller coaster life hands you. It will help you cope with financial problems.

And, an effective and efficient budget will take you only one to two hours a month to manage.

Here are the initial steps to create a budget. It’s a process, but the good news is there’s no such thing as a failed budget. This is your pathway to financial success, so never give up:

Step 1: Write down your financial goals.

Having goals is essential to tracking your progress.

Maybe your goals include debt freedom, building savings, or giving extravagantly. Whatever they are, take the time to think about your short term and long term goals. Write them down. These are your financial motivators.

Step 2: Record every single purchase you make, without exception.

Think of this as your budget prep.

No dollar should escape accountability. Record every dollar that leaves your pocket. Underestimating your spending is one of the greatest budgeting blunders. Knowing your spending habits will put you on the right track.

Step 3: Create your spending categories.

Here is where you will give your dollars purpose.

In addition to the obvious categories, list all larger non-monthly expenses (life insurance, birthdays, car repairs). Think of those big things that happen that you can plan for financially (property taxes, holidays, car insurance).

Don’t forget a “fun money” category or miscellaneous. You need to give yourself some breathing room.

Step 4: Hold a budget meeting (yes, with your spouse).

Budgeting is a meeting of the minds. It’s about healthy negotiation, compromise and respect. Here is where you will agree on how many dollars should be allocated to each of the spending categories.

This meeting should be short (and friendly).

Step 5: Schedule time to create your budget.

Determine the budget method and tools you will use and start your budget.

Think about your personality.You can use pencil and paper, software, envelopes, dry erase board, whatever. Just make it user friendly and, preferably, cheap.

Step 6: Tweak your budget at the beginning of every month.

Be adaptable and flexible. Budgeting should be a life long habit. Don’t quit.

Live within your means with the help of your budget. You’re sure to find financial peace of mind.

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How to prepare a budget

In personal finance, budget making is crucial as it’s necessary for managing your income, savings and investments. The best way to make a budget is to start by listing your expenses. In doing so, you should separate your fixed from your flexible expenses. Fixed expenses are set amounts such as rent or a mortgage as well as loan payments. Flexible expenses are those that may change each month such as food costs and utility bills.

It may take a few list making sessions to make sure you’ve recorded all your expenses. You won’t be able to make a budget that’s helpful for you unless all of your expenses are taken into consideration. In addition to all the costs necessary to run your home, also consider transportation, groceries, clothing, pet care, gifts and insurance as well as any other expenses you may have. The next step in preparing a workable budget is is to subtract the amount of your expenses against your total after taxes, or net, income.

If the difference is negative, it means you don’t have enough income to cover your basic expenses or for savings or investments. In that case, you’ll need to trim your flexible expenses and hopefully be able to earn additional income to better meet the fixed costs. If you can find a part-time job in addition to your regular work, this may not only help you fill the income gap, but also give you another money making position in case the worst happens and you lose your main source of earnings. When you make a budget and consider your expenses as well as your income, you should also plan for the worst case financial scenario as much as possible.

An emergency savings fund should be the first thing you add to your budget if the difference between your income and expenses is positive. Ideally, a savings of six months to a year of what it costs you to live should form your emergency fund. By setting aside savings from each paycheck, the emergency fund can be gradually built up. Only when you’re able to create a good savings base should you even consider investing any money.

Other than expenses and savings, as well as good investments if your finances allow, a spending allowance should also be established. If you give yourself a fair allowance to spend on whatever you want, it can help you find it easier to set aside money for your savings. The important thing is to always put your savings money aside first, then pay yourself your budgeted allowance. Trying to make a budget without allowing yourself any cash to spend isn’t realistic and may drive you to spend money that belongs in your emergency savings.

Accounting CPE Courses & Books

Many organizations prepare budgets that they use as a method of comparison when evaluating their actual results over the next year. The process of preparing a budget should be highly regimented and follow a set schedule, so that the completed budget is ready for use by the beginning of the next fiscal year. Here are the basic steps to follow when preparing a budget:

Update budget assumptions. Review the assumptions about the company’s business environment that were used as the basis for the last budget, and update as necessary.

Review bottlenecks. Determine the capacity level of the primary bottleneck that is constraining the company from generating further sales, and define how this will impact any additional company revenue growth.

Available funding. Determine the most likely amount of funding that will be available during the budget period, which may limit growth plans.

Step costing points. Determine whether any step costs will be incurred during the likely range of business activity in the upcoming budget period, and define the amount of these costs and at what activity levels they will be incurred.

Create budget package. Copy forward the basic budgeting instructions from the instruction packet used in the preceding year. Update it by including the year-to-date actual expenses incurred in the current year, and also annualize this information for the full current year. Add a commentary to the packet, stating step costing information, bottlenecks, and expected funding limitations for the upcoming budget year.

Issue budget package. Issue the budget package personally, where possible, and answer any questions from recipients. Also state the due date for the first draft of the budget package.

Obtain revenue forecast. Obtain the revenue forecast from the sales manager, validate it with the CEO, and then distribute it to the other department managers. They use the revenue information as the basis for developing their own budgets.

Obtain department budgets. Obtain the budgets from all departments, check for errors, and compare to the bottleneck, funding, and step costing constraints. Adjust the budgets as necessary.

Obtain capital budget requests. Validate all capital budget requests and forward them to the senior management team with comments and recommendations.

Update the budget model. Input all budget information into the master budget model.

Review the budget. Meet with the senior management team to review the budget. Highlight possible constraint issues, and any limitations caused by funding problems. Note all comments made by the management team, and forward this information back to the budget originators, with requests to modify their budgets.

Process budget iterations. Track outstanding budget change requests, and update the budget model with new iterations as they arrive.

Issue the budget. Create a bound version of the budget and distribute it to all authorized recipients.

Load the budget. Load the budget information into the financial software, so that you can generate budget versus actual reports.

The number of steps noted here may be excessive for a smaller business, where perhaps just one person is involved in the process. If so, the number of steps can be greatly compressed, to the point where a preliminary budget can possibly be prepared in a day or two.

How to prepare a budget

You can be both hopeful and realistic.

You can be both hopeful and realistic.

You know it’s important to weigh the costs and benefits before committing resources. So what are the crucial strategies when preparing a budget? How can you use past financial data to inform your assumptions? And how can you ensure your budget will help you meet your strategic goals? This advice, adapted from the book Finance Basics, will help you better understand how to create a useful budget.

Budgets should be ambitious but realistic. Don’t map out a budget that you can’t meet—but don’t underestimate the possibilities. Here’s how to begin.

First, list three to five goals that you hope to achieve during the period for which you are budgeting. For example:

  • Increase gross sales by 5%.
  • Decrease administrative costs as a percentage of revenue by 3 points.
  • Reduce inventories by 2% by the end of the fiscal year.

Make sure those goals line up with the organization’s strategic priorities.

Next, figure out how you’ll achieve them. (Remember that a budget is just a plan with numbers.) How can you generate more revenue? Will you need more sales representatives? Where can you cut costs or reduce inventories?

The smaller the unit you’re focusing on, the more detail you need. If you’re creating a budget for a 12-person sales office, you typically won’t have to worry about capital expenditures such as major upgrades to the building. But you should include detailed estimates for travel costs, telephones and utilities, and office supplies. As you move up in the organization, the scope of your budget will broaden. You can assume that the head of the 12-person office has thought about printer cartridges and gasoline for the sales reps’ cars. Your job now is to look at big-picture items such as computer systems and to determine how all the smaller-scale budgets fit together.

Other issues to consider when you’re preparing a budget:

  • Term. Is the budget just for this year, or is it for the next five years? Most budgets apply only to the upcoming year and are reviewed every month or every quarter.
  • Assumptions. At its simplest, a budget creates projections by adding assumptions to current data. Look hard at the assumptions you’re making. Let’s suppose you think sales will rise by 10% in the coming year if you add two more people to your unit. Explain what you’re basing that assumption on, and show a clear connection to at least one strategic goal (in this case, it’s probably to increase sales by a certain percentage).

Role-playing may help you here. Put yourself in the position of a division manager with limited resources and many requests for funding: Under those circumstances, what would persuade you to grant a request for two additional staff members?

Articulating your assumptions

Usually, budgeters take the previous year’s budget as a starting point. If you’re the manager of the Moose Head Division at the fictional company Amalgamated Hat Rack, for instance, you might look at the 2014 budget to get ideas about how to increase revenue, cut costs, or both. (See the figure below, “Moose Head Division, Amalgamated Hat Rack.” Note that the parentheses in the table indicate unfa­vorable variances.)

How to prepare a budget

Don’t look only at specific revenue or cost line items, because revenue and costs are closely linked. Instead, ask yourself what the budget shows about last year’s operations. As the table shows, the Standard Upright and the Moose Antler Standard exceeded sales expectations in 2014. Perhaps it would make sense to increase your sales projections for those products, particularly if your sales reps are optimistic about the prospects for more sales. The Standard Upright might be a particularly good choice, since it beat its 2014 projection by 9%. Could you increase the anticipated sales for this model by 5% or 10% in 2015? How much more would you have to spend on sales or marketing to achieve this increase? To make the decision, you’ll need as much data as you can get about pricing, competitors, new sales channels, and other relevant issues.

Alternatively, you might plan to eliminate some products. The Electro-Revolving model, for example, is faring poorly. Would it be better to cut this line and promote the newer Hall/Wall model? That would eliminate $81,250 in sales, but the Electro-Revolving is expensive to produce, so discontinuation might not have much impact on the bottom line.

Other questions to ask yourself:

  • Will you keep prices the same, lower them, or raise them? A price increase of 3% might offset the budget’s 2014 sales shortfall, provided that it doesn’t dampen demand.
  • Do you plan to enter new markets, target new customers, or use new sales strategies? How much additional revenue do you expect these efforts to bring in? How much will these initiatives cost?
  • Will your cost of goods change? For example, perhaps you plan to cut down on temporary help and add full-time employees in the plant. Or perhaps you hope to reduce wage costs through automation. If so, how much will it cost to automate?
  • Are your suppliers likely to raise or lower prices? Are you planning to switch to lower-cost suppliers? Will quality suffer as a result? If so, how much will that affect your sales?
  • Do you need to enhance your product to keep your current customers?
  • Does your staff need further training?
  • Are you planning to pursue other special proj­ects or initiatives?

Articulating your answers to questions like these en­sures that your assumptions won’t go unexamined. It will help you create budget numbers that are as real­istic as possible.

Adapted from

How to prepare a budget

Finance Basics (20-Minute Manager Series)
  • Save
  • Share

Quantifying your assumptions

Now you need to translate your assumptions and sce­narios into dollar figures. Begin with last year’s budget and make the changes that fit your plans. If your entire staff of 12 needs sales training, for instance, find out how much the training will cost and add in that amount. Ask your coworkers for their ideas about costs as well. And consult the websites of trade associations or trade publications for data on indus­try averages.

Because your budget must be compared and com­bined with others in the organization, your company will probably provide you with a standard set of line items. When you’ve filled those in, take a step back: Does this budget meet your unit’s goals? It’s easy to overlook big-picture goals as you get into line-by-line details. Is your budget defensible? You may be per­fectly happy with it, but you’ll need to win over the budget committee. Once again, push your assump­tions. Could you do with one extra staff member instead of two? If not, be sure you can make a good argument as to why not.

How to prepare a budget

You can be both hopeful and realistic.

You can be both hopeful and realistic.

You know it’s important to weigh the costs and benefits before committing resources. So what are the crucial strategies when preparing a budget? How can you use past financial data to inform your assumptions? And how can you ensure your budget will help you meet your strategic goals? This advice, adapted from the book Finance Basics, will help you better understand how to create a useful budget.

Budgets should be ambitious but realistic. Don’t map out a budget that you can’t meet—but don’t underestimate the possibilities. Here’s how to begin.

First, list three to five goals that you hope to achieve during the period for which you are budgeting. For example:

  • Increase gross sales by 5%.
  • Decrease administrative costs as a percentage of revenue by 3 points.
  • Reduce inventories by 2% by the end of the fiscal year.

Make sure those goals line up with the organization’s strategic priorities.

Next, figure out how you’ll achieve them. (Remember that a budget is just a plan with numbers.) How can you generate more revenue? Will you need more sales representatives? Where can you cut costs or reduce inventories?

The smaller the unit you’re focusing on, the more detail you need. If you’re creating a budget for a 12-person sales office, you typically won’t have to worry about capital expenditures such as major upgrades to the building. But you should include detailed estimates for travel costs, telephones and utilities, and office supplies. As you move up in the organization, the scope of your budget will broaden. You can assume that the head of the 12-person office has thought about printer cartridges and gasoline for the sales reps’ cars. Your job now is to look at big-picture items such as computer systems and to determine how all the smaller-scale budgets fit together.

Other issues to consider when you’re preparing a budget:

  • Term. Is the budget just for this year, or is it for the next five years? Most budgets apply only to the upcoming year and are reviewed every month or every quarter.
  • Assumptions. At its simplest, a budget creates projections by adding assumptions to current data. Look hard at the assumptions you’re making. Let’s suppose you think sales will rise by 10% in the coming year if you add two more people to your unit. Explain what you’re basing that assumption on, and show a clear connection to at least one strategic goal (in this case, it’s probably to increase sales by a certain percentage).

Role-playing may help you here. Put yourself in the position of a division manager with limited resources and many requests for funding: Under those circumstances, what would persuade you to grant a request for two additional staff members?

Articulating your assumptions

Usually, budgeters take the previous year’s budget as a starting point. If you’re the manager of the Moose Head Division at the fictional company Amalgamated Hat Rack, for instance, you might look at the 2014 budget to get ideas about how to increase revenue, cut costs, or both. (See the figure below, “Moose Head Division, Amalgamated Hat Rack.” Note that the parentheses in the table indicate unfa­vorable variances.)

How to prepare a budget

Don’t look only at specific revenue or cost line items, because revenue and costs are closely linked. Instead, ask yourself what the budget shows about last year’s operations. As the table shows, the Standard Upright and the Moose Antler Standard exceeded sales expectations in 2014. Perhaps it would make sense to increase your sales projections for those products, particularly if your sales reps are optimistic about the prospects for more sales. The Standard Upright might be a particularly good choice, since it beat its 2014 projection by 9%. Could you increase the anticipated sales for this model by 5% or 10% in 2015? How much more would you have to spend on sales or marketing to achieve this increase? To make the decision, you’ll need as much data as you can get about pricing, competitors, new sales channels, and other relevant issues.

Alternatively, you might plan to eliminate some products. The Electro-Revolving model, for example, is faring poorly. Would it be better to cut this line and promote the newer Hall/Wall model? That would eliminate $81,250 in sales, but the Electro-Revolving is expensive to produce, so discontinuation might not have much impact on the bottom line.

Other questions to ask yourself:

  • Will you keep prices the same, lower them, or raise them? A price increase of 3% might offset the budget’s 2014 sales shortfall, provided that it doesn’t dampen demand.
  • Do you plan to enter new markets, target new customers, or use new sales strategies? How much additional revenue do you expect these efforts to bring in? How much will these initiatives cost?
  • Will your cost of goods change? For example, perhaps you plan to cut down on temporary help and add full-time employees in the plant. Or perhaps you hope to reduce wage costs through automation. If so, how much will it cost to automate?
  • Are your suppliers likely to raise or lower prices? Are you planning to switch to lower-cost suppliers? Will quality suffer as a result? If so, how much will that affect your sales?
  • Do you need to enhance your product to keep your current customers?
  • Does your staff need further training?
  • Are you planning to pursue other special proj­ects or initiatives?

Articulating your answers to questions like these en­sures that your assumptions won’t go unexamined. It will help you create budget numbers that are as real­istic as possible.

Adapted from

How to prepare a budget

Finance Basics (20-Minute Manager Series)
  • Save
  • Share

Quantifying your assumptions

Now you need to translate your assumptions and sce­narios into dollar figures. Begin with last year’s budget and make the changes that fit your plans. If your entire staff of 12 needs sales training, for instance, find out how much the training will cost and add in that amount. Ask your coworkers for their ideas about costs as well. And consult the websites of trade associations or trade publications for data on indus­try averages.

Because your budget must be compared and com­bined with others in the organization, your company will probably provide you with a standard set of line items. When you’ve filled those in, take a step back: Does this budget meet your unit’s goals? It’s easy to overlook big-picture goals as you get into line-by-line details. Is your budget defensible? You may be per­fectly happy with it, but you’ll need to win over the budget committee. Once again, push your assump­tions. Could you do with one extra staff member instead of two? If not, be sure you can make a good argument as to why not.

How to Prepare a Budget :: Budget is a financial plan. All of us know what is budget as we do make our financial plans in our personal life also. Planning is an important part of budget and unless it is done in a systematic and planned, the project may end up with shortage of funds or under-utilisation of funds in some or all heads. Though we are all doing budgets, this may help you in refreshing the plans/ideas. As we all know, before starting a project we do the project planning by doing the need assessment and identifying the issues and then designing the project. While designing the project we also need to look at the financial aspects of the projects such as the programme costs, staff, administration etc.etc. In the same way when we plan the financial plan (budget), we also need to look at the project in total and accordingly the financial planning (budgeting) needs to be done.

First of all we need to understand the overall project for which we are going to prepare a budget. After that you need to split into the categories under which you need to prepare the budget. Some examples are below:

I. Programme/Activities:

1) Let us look at the Identified Activities of the project

2) Prepare a financial plan to successfully take up the above activities

3) This could include e.g. training programmes, meetings, income generation programmes,capacity building so on and so forth depending upon the type of project you are taking up.

4) You should have a detailed planning for each and every activity i.e. for example let us take health awareness camp:

  • a) Number of Camps: How many likely camps during the project period
  • b) Number of days each camp runs for: If the each camp runs for 3 days you need to do the financial plan first for a day then calculate it for 3 days.
  • c) Number of Participants for each camp: How many likely participants for each camp and how much travel, food and lodging would cost for each participant. In some cases, some participants depends on their daily wages – may also have to compensate them etc.
  • d) Number of Resource Persons : For each person what will be the expenditure on consultancy fee, travel, stay etc. for each day. Then multiply the same with the number of days.
  • e) Cost of hiring of vehicles/fuel costs during the camp
  • f) Stationery required – clearly plan item-wise and their cost
  • g) Audio Visuals, pamphlets etc.

Above are some examples, however you need to see what else needed or what is not needed from the above list. Accordingly you need to list out all the things needed for organizing a camp.

Here we have taken example of one activity of a project – like that for each activity we need to do the budgeting.

II. Staff Requirements: The other most important thing that we need to look at is the staff requirement for successful implementation of the project. Some examples are::

You may come to a point when you wonder, where did all your money go? You’ve been working so hard, and yet, you don’t have enough savings. Sometimes it’s not about how much you earn. Sometimes it’s about the way you spend. And here comes the importance of creating a personal budget plan. Budgeting can be a way to control your expenses. It can help you achieve your financial goals.

To create an effective budget plan, you must be honest about your income and your spending. This will require minimal effort, but it can make a significant impact on your finances. In addition, creating a budget plan will help you decide what your priorities should be and where to spend your money best. In this article, we will guide you on how to make a successful personal budget plan.

Write down all your expenses

The first thing you need to do when creating a budget plan is to list down your daily and monthly expenses, from your food consumption to your car payments and utility bills. Once you have everything listed, assess which of these expenses you can reduce. For instance, to lessen your monthly power bill, you may opt to switch to solar. You may seek help from reliable solar panel installers, like Cross Country Construction. You can be confident that you’ll get excellent quality solar panels if you choose Cross Country Construction.

Identify your income

Once you have listed down all your expenses, the next step would be to calculate your income. But, first, identify how much your take-home would be after paying your taxes and insurances.

Separate your needs from your wants

When creating a budget plan, you have to know your needs and which ones are your wants. This will help you cut your expenses. Before purchasing an item, ask yourself first if this is something that you can live with or without. If you want to save money, you have to set your priorities. It will be easier for you to make decisions if you know what your priorities are.

Prepare for seasonal and unexpected expenses

Whether you like it or not, there will be times when unexpected expenses will come. Whether it is a medical expense or an accidental cost, make sure that you create an amount for this type of expense. Whatever it may be, you have to make early preparations.

Make sure to put your plans into action

Your budget planning won’t be successful if you won’t put it into action. Likewise, everything will be useless if you will not apply them in your daily life.

Creating a detailed budget plan has plenty of benefits. For example, if one of your goals is to save money to purchase a new home or car, budgeting will be a big help. Help yourself to cut down your expenses, and know what your priority should be. Always stick to your plan and push yourself until you achieve your financial goals.

How to prepare a budget

Cavan Images / Getty Images

For small businesses, budgeting is one of the most important tasks to accomplish. A business budget details your expected revenue and expenses, and provides you with a plan to follow so you know what to expect to stay solvent.

One of the key methods to develop your business budget is financial forecasting, which is the process of estimating or predicting your business’s performance using models like income statements and balance sheets.

Small-business budgets can be as simple or as complex as you want to make them, but if your business manufactures products instead of providing services, the development of a production budget is critical to the budgetary process.

Key Takeaways

  • The production budget provides your business with a plan for how much product must be manufactured during a given time period.
  • Before preparing a production budget, the sales budget must first be calculated so your business will know how much to produce.
  • Without a production budget, you wouldn’t know how much raw material to purchase, what size facility you should use, the amount of workers needed, or how much equipment you’ll need.

What Is a Production Budget?

The production budget calculates the number of units of products manufactured by a business that are necessary to meet its sales budget for a given time period. The production budget is stated in units of the product to be produced rather than in dollar amounts. It is derived from the business’s sales budget and how many units of safety stock the business wants to keep on hand.

Safety stock is the excess amount of the product in finished goods inventory that the business keeps so it won’t stock out.


Before preparing a production budget, however, the sales budget must be calculated so the business will know how much to produce. If you are setting up a sales budget for a new product, it is difficult to know the consumer demand. You can do market research to see what businesses similar to yours charge for the product. If it is an established product, you can use historical information based on past sales. Also take into consideration any changes in economic conditions that can affect your business.

Why the Production Budget Is Important

The production budget tells you how much of your product you must manufacture in a given time period given your sales budget for that same period. The amount of product you must manufacture has implications for your workforce, your production facility, your equipment needs, and the materials you need to purchase. These items have sub-budgets of their own: raw materials budget, direct labor budget, and overhead budget.

The production budget takes into account the beginning inventory of the product that the firm has in stock. The beginning inventory from one quarter is the ending inventory, or finished goods inventory, carried over from the previous quarter.

The production budget is also an important part of the firm’s system of inventory control. You want to keep enough of your product on hand so you don’t stock out but not so much that you are holding obsolete inventory. Stockouts cost the firm customer goodwill, while obsolete inventory costs the firm in storage space.

Many decisions are dependent on your production budget. Without it, you don’t know how much raw material to buy, how many people to employ, the size your production facility should be, or how much equipment you’ll need.

How To Calculate a Production Budget

A production budget is usually calculated for each quarter but may be calculated for any time period.

Use this formula to calculate your production budget:

How to prepare a budget

Here is a breakdown of the elements of the formula:

  • Budgeted Sales: Taken from the sales budget for each time period
  • Desired Ending Inventory: Another term for finished goods inventory; it is the usually the amount of safety stock a business wants to keep on hand.
  • Beginning Inventory: The Desired Ending Inventory carried over from the previous time period
  • Required Production: What your business must produce in the current time period to meet all its needs as detailed by the sales budget

Production Budget Example

Sue owns a small bakery that is a two-person operation. Sue is the sole proprietor and she has one employee. Sue wants to forecast how many loaves of rye bread she needs to make each quarter in order to fulfill her sales budget. Here is Sue’s production budget.

Sue’s Bakery Production Budget for the Year Ended December 31, 20XX

First Quarter Second Quarter Third Quarter Fourth Quarter
Forecasted Unit Sales 2000 3,000 5,000 4,000
+ Ending Inventory (Finished Goods) 250 250 250 250
= Total Production Required 2250 3,250 5,250 4,250
– Beginning Inventory 250 250 250 250
= Units to be Manufactured 2,000 3,000 5,000 4,000

Sue’s initial forecast for sales increases then declines in the fourth quarter. The first line, forecasted unit sales, comes from the sales budget. The ending finished goods inventory is forecast to stay the same for the year at 250 units. This is the company’s safety stock. The third line item is the production required to cover forecasted sales, taking safety stock into account. The ending finished goods inventory becomes the beginning inventory for the next quarter in line item 5. Subtracting that from the total production required gives Sue the loaves of bread she will need to produce.

The Bottom Line

If your business manufactures a product instead of a provider of services, the development of a production budget is critical to keep your operations on track. The production budget is usually the next budget developed after the sales budget, and its development depends on a variety of financial forecasting models, like income statements and balance sheets. By learning how to prepare and calculate a production budget, you can be better equipped to understand your business’s needs.

Frequently Asked Questions (FAQs)

Why is a company’s sales budget developed before its production budget?

Unless a business knows how much it expects to sell in a given time period by preparing a sales budget, it can’t know how much of its product it must produce. Companies that provide services do not prepare a production budget.

What info do you need for a production budget?

In order to develop a production budget, you first need to look at the sales budget. The sales budget will give you forecasted sales for the time period for which you are budgeting. It will state forecasted sales in units and dollars. For the production budget, however, you use only the unit figure. You also need to know how much safety stock your business wants to keep on hand.