The success of work in any institution requires good planning, which includes a specification of the objectives of this institution and the steps necessary to achieve these goals. The estimated budget is one of the most important planning factors, on the basis of which financial conditions can be controlled and the extent of adherence to the pre-established plan can be assessed. It is also a form of financial forecasting, which provide the project with the framework on which the planning and control processes are based. In this article, we will talk about what an estimated budget is and what are the steps for preparing an estimated budget.

What is the estimated budget?

It is the process of financial planning or the documented financial plan prepared by the management of any organization, to predict the size of the expenses and profits of that institution during a specific period of time, most within a year, with the aim of improving performance, anticipating changes that may occur, facilitating monitoring of the work plan, and detecting any defects or deficiencies.

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Importance of estimated budget

estimated budget

The estimated budget is one of the means of financial planning that occurs at the level of organizations, and through the estimated budget, the general lines of the organization’s activities are drawn in financial periods subsequent to the period of setting its estimated budget.

And the following points illustrate the importance of the estimated budget:

  • Provide an expected summary of the activities that the company or institution will undertake related to its commercial activity.
  • Assisting in anticipating the production or manufacturing cost that the organization will incur in order to be able to continue the production or sales operations as hoped by the decision makers in the organizations.
  • Estimating the production capacity of the organization and determining the extent of its ability to sell what is produced according to market changes and the overall conditions that may affect the organization’s activity positively or negatively.
  • Anticipating future needs and expenses, and rationing them in proportion to the size of the return, to protect the institution from exposure to financial crises, or what is known in economics as the cash deficit.
  • Monitoring the workflow in the institution, and highlighting any deviation in the budget from the expected estimated ratios, which helps to expedite the search for the problem causing it and its solution.
  • Helping executives take the necessary decisions with confidence and consistency, to achieve the desired goals, based on what the budget indicates.

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Difference between the estimated budget and the balance sheet

People often confuse the estimated budget with the balance sheet, and in fact the discrepancy between the estimated budget and the balance sheet is wide as:

The estimated budget predicts and estimates for the future of results, sales, revenues and expenses. The balance sheet records what happened in the past in the form of revenues, expenses and other financial statements.

The estimated budget aims to achieve planning and control, while the balance sheet aims to clarify the financial position of the facility.

The estimated budget contains predetermined figures that are, defined in advance before operations actually occur, while the budget contains actual figures on operations that actually occurred.

The estimated budget is prepared for a specific future period, while the budget or the statement of financial position is prepared on a specific date for a past period.

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What are the estimated budget preparation steps?

The estimated budget carried out by the institution is the starting point for preparing the rest of the budgets, which depend mainly on sales figures in estimating some other items related to the second budgets.

There is a number of steps that go through the process of preparing the estimated budget, and the following are the steps of preparing the estimated budget:

  1. Estimated cash receipts

By estimating the value of receivables, several items are identified, estimated and expected, which are the following:

  • Revenue from all cash sales.
  • Revenues resulting from the collection of all sums of money owed by debtors; As a result, merchandise has been sold on the account.
  • Financial revenues generated from the sale of shares, bonds and securities in general.
  • The financial revenue obtained by the enterprise as a result of the sale of fixed assets.
  • Revenues that can be obtained by the institution from bank loans.
  1. Estimate cash payments

Many of the payments that the institution will pay during the fiscal year, and they are monitored through the discretionary budget and these payments are as follows:

  • All expenses paid by the institution; to cover all needs and purchases.
  • To pay all expenses owed to individual creditors; As a result of merchandise purchased but not paid for in cash.
  • Expenses that the institution must pay in cash.
  • Cash paid as a result of the purchase of securities such as stocks and bonds.
  • Sums of money and expenses to be paid; As a result of the purchase of some fixed assets.
  • Profits distributed to shareholders and partners.
  • Pay off any loans or obligations on the institution.
  • Corporate tax expenses such as sales tax and income tax.
  1. Extracting net cash flow

The net cash flow is usually determined by finding the difference and comparing the cash expenses and revenues, for each month of the year, and the following cases will be determined, which are as follows:

Cash surplus:

It is the financial situation that the institution is going through from a stage of financial prosperity and expansion. During this period, the revenues that come to the foundation’s fund are greater than the expenses that are paid; then the institution to carry out new projects and achieve more profits.

Cash deficit:

estimated budget

In this case, the institution is going through a state of financial reversal and contraction; where the expenses incurred by the institution, which must be paid by it, are greater than the revenues.

Then the management of the institution will resort to searching for ways and methods that would increase the proportion of financial revenues.

One of these ways is to reduce financial expenditures that are in unimportant and indispensable places,

As well as work to increase the proportion of financial investments that generates profits for the institution, and work to increase capital by including new partners.