Choosing A Budget Period

Budgets covering acquisition of land, buildings, and other items of capital equipment (often called capital budgets), generally cover a lengthy time horizon that extend many years into the future. It is needed to assist management in its planning and to ensure that funds will be available when purchases of equipment become necessary.

As time passes, capital equipment plans realise and the capital budget is updated accordingly. Without such long-term planning, an organisation can suddenly need a substantial amount of capital but find that no funds are available to make the purchases.

Operating Budgets

Operating budgets are ordinarily set to cover a one-year period. The one-year period should correspond to the company's fiscal year so that the budget figures can be compared with the actual results. Many companies divide their budget year into four quarters. The first quarter is then subdivided into months, and monthly budget figures are established. These near-term figures can usually be established with considerable accuracy. The last three quarters are carried in the budget at quarterly totals only. As the year progresses, the figures for the second quarter are broken down into monthly amounts then the third quarter figures are broken down, and so forth. This approach has the advantage of requiring periodic review and reappraisal of budget data throughout the year.

A Continuous/Perpetual Budget

This type of budget is a 12-month budget that rolls forward one month (or quarter) as the current month is completed. In other words, one month is added to the end of the budget as each month (or quarter) ends. This approach keeps managers focused on the future at least one year ahead. Managers using this approach to budgeting have less danger of becoming too focused on short-term results as the year progresses.