Chapter 1. Overview of Budgets and Financial Models


The Cambridge Dictionary defines a budget as "a plan to show how much money a person or organization will earn and how much they will need or be able to spend." Businesses use several different types of budgets to manage their operations. Whatever form various budgets may take, the primary goal of all budgets is to provide a tangible and quantifiable estimate of the receipt and allocation of resources. In the context of this book, a budget represents a core element of a financial model; financial models are discussed later in the chapter.

Businesses use several types of budgets for planning purposes. These budgets are typically categorized by the timeframe that they cover. A "long-range plan," one type of budget, typically forecasts financial statements out 5 to 10 years into the future. Long-range plans usually evolve from "strategic plans," which define the overall mission and goals for a business. These long-range plans are coordinated with Capital Budgets, which map out large monetary commitments for things such as facilities and large pieces of equipment.

From a budgeting perspective, this book is focused on the "Master Budget," which forecasts a business's complete operations over the medium-term (1–5 years). The Master Budget consists of many interrelated financial and operating schedules, including sales, purchases, and operating expenses, among many others. While some of the key outputs of a Master Budget are the ...

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