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Income and expenditure budget: what is it and how to draw it up?

Learn the complex management of company cash flows, liquidity control and working capital management in the course “Financial Management of the Company”

BDR (budget of income and expenses) of a company is a forecast report, which provides information on income, expenses and, as a result, on the profit or loss of an enterprise for a certain period. The BDR is compiled to see what financial result (profit or loss) the planned actions (revenue and expenses) will lead for the period under review. The actual profit of the company is reflected in the accounting form “Profit and loss report” or Income statement.

BDR is formed as follows:
1.from income (the company’s revenue for a certain period)
2. expenses are deducted
3.the profit or loss of the company is obtained

Let’s consider in more detail what the information on each item consists of and how it is collected.

Income – what the company plans to sell for a certain period, revenue. It is considered on an accrual basis, i.e. when all parties sign primary documents.

The forecast information on the company’s income is collected based on the plan for future sales, and also take into account the current contracts under which the revenue should go in the period of interest to us.

1. Subtracted from income direct cost of sales: this is the cost of raw materials and materials, the salary of production personnel, depreciation of fixed assets, electricity, fuel and other costs necessary to ensure the production process.

These costs are calculated by knowing the planned production volume and unit cost.

It turns out gross profit (margin income). This is the first of the types of profit, which shows how much a company will earn minus direct production costs.

2. Further, the gross profit is reduced by the amount overhead costs (commercial and general business). This can be marketing, storage, sales, management and administrative expenses, etc.

These costs can both depend on the volume of production, and be constant. According to them, their own budget is usually drawn up, and the method of their accrual is fixed in the accounting policy of the company.

As a result, it remains Operating profit, which is considered one of the most important indicators, it shows how much a company makes or loses from its core business.

3. The next step is to add other income and deduct other expenses and interest on loans and borrowings.

The result is profit before tax

4. The received profit is deducted income tax, and it turns out net profit of an enterprise… From this profit, dividends are paid to the owner, it provides the stability of the company and opportunities for investment.

Below is an example of what a company’s BDR might look like:

To compile and correctly interpret the BDR, it is important to take into account:

1. Income and expenses are looked at for a certain period, and this imposes a number of features on the preparation of the report. Suppose we have a long-term project, and during the first period we purchased a lot of materials, but the proceeds have not yet passed. In the second period, proceeds went through, but no materials were purchased. If the data were reflected in the report “as is”, according to primary documents, then in the first period we would have shown an exaggerated loss, and in the next – excess profit. Therefore, it is generally accepted to show revenue and all related costs (direct and overhead) in one period. This makes the profit indicator somewhat arbitrary, and therefore it is always looked at together with the BDDS and the balance sheet of the enterprise.

2. The terms of payment for BDR do not matter, and the profit figure does not mean at all that we have this amount in free access on the account. There are often cases when there is a profit on securities, all obligations are fulfilled, and the money comes in a few months.

3. The BDR should reflect real income and expenses, excluding indirect taxes (VAT, excise taxes). The basic principle is that the amounts of VAT and excise taxes that the company receives from the customer, but must pay to the state at the end of the reporting period, are not reflected as income. And the expenses do not take into account the amounts of indirect taxes that have passed through the documents, but will later be accepted for reimbursement. If the company, for some reason, cannot comply with these principles (for example, it is impossible to refund VAT on some types of transactions), then this tax is taken into account in the BDR, because it becomes a real income or expense.

4. The way of accounting for direct costs and overhead costs in the BDR is determined by the accounting policy of the enterprise, and it is important for managers analyzing management reporting to know the principles of accounting policy in order to correctly interpret the report data.

BDR shows in detail how the profit or loss of the enterprise is added up, and thereby enables the management personnel to analyze and work with profit for each item. There are two ways to increase profits – by increasing revenues and reducing costs. Revenue growth is achieved through the expansion of sales volumes. Much depends on the specifics of the market, and sometimes it is simply impossible to increase income. There are many more opportunities to influence costs. Revisions and cost reductions are necessary, but they should not interfere with ongoing contracts, eliminate strategic costs, or influence employees so that they lose the initiative to make new proposals. Then the company has a high chance of being successful in both the short and long term.

Learn the complex management of company cash flows, liquidity control and working capital management in the course “Financial Management of the Company”

Moris Akline
About author

Speculative operations in the foreign exchange and stock market. Work with futures and indices on CME. Work on FORTS and RTS. Development of portfolios and investment strategies for clients. Knowledge of technical (price charts of various types, indicators and oscillators, trends, channels, support / resistance levels) and fundamental analysis, take note of news. I work according to my trading strategy in compliance with the rules of capital management and risk management. Development of trust management strategies. Technique of order execution, placing and changing protective stop-losses, hedging.
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