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How to Make Budgets [Complete Steps with Examples]



How To Make Budget - Complete StepsBudget, in short is a company’s annual financial plan. In long word, it is a set of formal (written) statements of management’s expectations regarding sales, expenses, production volume, and various financial transactions of the firm for the coming period. Budget is consists of pro forma statements about the company’s finances and operations. What steps needed to make a budget?

It is the company’s tool for both planning and control. At the beginning of the period, the budget is a plan or standard; and at the end of the period, it serves as a control device to help management measure the firm’s performance against the plan so that future performance may be improved.


Through case examples, this post provides a sequenced step-by-step guide to set up a budget, since the sales stage until the cash budget, budgeted income statement and budgeted balance sheet. The discussion is started from the general structure of the budget. It’s a long-long page. For faster page-load, I splitted them into 11 (eleven) pages (each page contains one step – one type of budget.)  Enjoy!



General Structure Of a Complete Set of Budget

A complete set of budget is classified broadly into two categories which are inter-related one to the other:

1. Operational Budget – It reflects the results of operating decisions, consists of eight elements follows:

  • Sales Budget (including a computation of “expected cash collection”)
  • Production Budget
  • Ending Inventory Budget
  • Direct Materials Budget (including a computation of “expected cash disbursements/payment for materials)
  • Direct Labor Budget
  • Factory Overhead Budget
  • Selling and Administrative Expense Budget
  • Pro Forma (or Budgeted) Income Statement

2. Financial budget – It reflects the financial decisions of the firm, consists two of:

  • Cash Budget
  • Pro Forma (Budgeted) Balance Sheet

The major steps in preparing the budget are:

Step-1. Prepare a sales forecast (Sales Budget)
Step-2. Determine production volume (Production Budget)
Step-3. Estimate manufacturing costs and operating expenses (Direct Material, Direct Labor and Factory Overhead Budget)
Step-4. Determine cash flow and other financial effects (The Cash Budget)
Step-5. Formulate projected financial statements (Budgeted Income Statement and Balance Sheet)

To take you through the actual steps, I make a company named “Lie Dharma Putra Company.” It is a manufacturer of a single product, as its annual budget is created for the year 2011. The company develops its budget on a quarterly basis. The example will highlight the variable cost–fixed cost breakdown throughout. Let’s start from the Sales Budget. Read on the next page (click page 2 at the bottom of this page).


Making the Sales Budget

The Sales Budget (some company may call it as “Sales Forecast” Or “Sales Projection”) is the starting point in preparing the operating budget, since estimated sales volume influences almost all other items appearing throughout the annual budget. The sales budget gives the quantity of each product expected to be sold. (For the Lie Dharma Putra Company, there is only one product. Of course, in a real company, most likely multiple products—that you can add lines of product row-by-row).

Basically, there are three ways of making estimates for the sales budget:

  • Make a statistical forecast on the basis of an analysis of general business conditions, market conditions, product growth curves, etc.
  • Make an internal estimate by collecting the opinions of executives and sales staff.
  • Analyze the various factors that affect sales revenue and then predict the future behavior of each of those factors.

After sales volume has been estimated, the sales budget is constructed by multiplying the estimated number of units by the expected unit price. Generally, the sales budget includes a computation of cash collections anticipated from credit sales, which will be used later for cash budgeting (see below example).


Assume that of each quarter’s sales as follows:

  • 70 percent is collected in the first quarter of the sale;
  • 28 percent is collected in the following quarter; and
  • 2 percent is uncollectible

So here is the “Sales Budget” come along with the “Schedule of Expected Cash Collection”:

Sales Budget-Expected Cash Collection
The next step is constructing the “Production Budget”. Follow on the next page below.


Production Budget

After sales are budgeted, the production budget can be determined. The number of units expected to be manufactured to meet budgeted sales and inventory is set forth. The expected volume of production is determined by subtracting the estimated inventory at the beginning of the period from the sum of units to be sold plus desired ending inventory. See below example.


Assume that ending inventory is 10 percent of the next quarter’s sales and that the ending inventory for the fourth quarter is 100 units. Using data from the “Sales Budget“, here is the “Production Budget”:

Production Budget


With the “Production Budget”, you can carry on the next process; constructing the “Direct Materials Budget”.


Direct Materials Budget

When the level of production has been computed, a direct materials budget is constructed to show how much material will be required and how much of it must be purchased to meet production requirements. The purchase will depend on both expected usage of materials and inventory levels.

The formula for computing the “Purchase” is as follow:

[Amount of materials to be purchased in units] = [Material needed for production un units] + [Desired ending material inventory in units] – [Beginning material inventory in units]

The direct materials budget is usually accompanied by a computation of “Schedule of Expected Cash Disbursement (Payments)” for the purchased materials.


Assume that ending inventory is 10 percent of the next quarter’s production needs; the ending materials inventory for the fourth quarter is 250 units; and 50 percent of each quarter’s purchases are paid in that quarter, with the remainder being paid in the following quarter. Also, 3 pounds of materials are needed per unit of product at a cost of $2 per pound.

Using the “Production Budget”, here are the “Direct Material Budget” and “Schedule of cash Disbursement (Payment)” comes look a like:

Direct Materials Budget - Expected Cash Disbursement

The next step is the “Direct Labor Budget.


Direct Labor Budget

The production budget also provides the starting point for the preparation of the “Direct Labor Cost Budget”. The direct labor hours necessary to meet “Production Requirements” multiplied by the estimated hourly rate yields the total direct labor cost.


Assume that 5 hours of labor are required per unit of product and that the hourly rate is $5. Here is the Direct Labor Cost Budget:

Direct Labor Budget

After this, you can continue to create the “Factory Overhead Budget.


Factory Overhead Budget

The factory overhead budget is a schedule of all manufacturing costs other than direct materials and direct labor. Using the contribution approach to budgeting requires the development of a “Predetermined Overhead Rate” for the variable portion of the factory overhead. Later, in developing the “Cash Budget”, note that the “Depreciation” does not entails a cash outlay and therefore must be deducted from the “Total Factory Overhead” in computing cash disbursements for factory overhead.


For the following factory overhead budget, assume that:

  • Total factory overhead is budgeted at $6,000 per quarter plus $2 per hour of direct labor.
  • Depreciation expenses are $3,250 per quarter.
  • All overhead costs involving cash outlays are paid in the quarter in which they are incurred.

The Factory Overhead Budget figure becomes as shown below:

Factory Overhead Budget


The next step of the operating budget set is the “Ending Inventory Budget”.


Ending Inventory Budget

The ending inventory budget provides the information required for constructing budgeted financial statements with 2 main functions:

  • It is useful for computing the cost of goods sold on the budgeted income statement.
  • It gives the dollar value of the ending materials and finished goods inventory that will appear on the budgeted balance sheet.


For the ending inventory budget, we first need to compute the unit variable cost for finished goods, as follows:
Units Cost       Qty           Amount

Direct materials                                   $2           3 pds                $6
Direct labor                                           $5            5 hrs             $25
Variable overhead                              $2           5 hrs              $10
Total variable manufacturing cost                                       $41

Here is the “Ending Inventory Budget” shown below:

Qty                               Unit Costs      Total

Direct materials                 250 pounds (pds)      $2               $500
Finished goods                   100 units                      $41             $4100

To be able to construct the Cash Budget and the Pro forma Financial Statements, you need to construct the “Selling and Administrative Expense Budget” first.


Selling and Administrative Expense Budget

The selling and administrative expense budget lists the operating expenses involved in selling the products and in managing the business.


Let’s say the variable selling and administrative expenses amount of $4 per unit of sale, including commissions, shipping, and supplies; expenses are paid in the same quarter in which they are incurred, with the exception of $1,200 in income tax, which is paid in the third quarter.

Referring to the Sales Budget, the “Selling and Administrative Expense Budget” become as follows:

Selling and Admin Expenses Budget

Until this stage, now we have enough data to construct the 3 most essential set of a company’s budget: “Cash Budget“, “Pro forma (Budgeted) Income Statement,” and the “Budgeted Balance Sheet.


Cash Budget

The cash budget is prepared in order to forecast the firm’s future financial needs. It is also a tool for cash planning and control.

Because the cash budget details the expected cash receipts and disbursements for a designated time period, it helps avoid the problem of either having idle cash on hand or suffering a cash shortage. However, if a cash shortage is experienced, the cash budget indicates whether the shortage is temporary or permanent, that is, whether short-term or long-term borrowing is needed.

The cash budget typically consists of four major sections:

  • The receipts section, which gives the beginning cash balance, cash collections from customers, and other receipts
  • The disbursements section, which shows all cash payments made, listed by purpose
  • The cash surplus or deficit section, which simply shows the difference between the cash receipts section and the cash disbursements section
  • The financing section, which provides a detailed account of the borrowings and repayments expected during the budget period


Let’s assume the following:

  • The company desires to maintain a $5,000 minimum cash balance at the end of each quarter.
  • All borrowing and repayment must be in multiples of $500 at an interest rate of 10 percent per annum.
  • Interest is computed and paid as the principal is repaid. Borrowing takes place at the beginning and repayments at the end of each quarter.
  • The cash balance at the beginning of the first quarter is $10,000.
  • A sum of $24,300 is to be paid in the second quarter for machinery purchases.
  • Income tax of $4,000 is paid in the first quarter.

With these assumptions combined with the previous budgets that we have generated, the Cash Budget becomes as follows (please pay attention to the note below the budget figure):

Cash Budget


  • Collection from customer – from the “Schedule of Expected Cash Collections
  • Direct Materials – from the “Direct Material Budget
  • Direct Materials – from the “Direct Labor Budget
  • Factory Overhead – from the “Factory Overhead Budget
  • Selling and Administrative – from the “Selling and Admin Expenses Budget

Next, you can easily construct the “Pro forma (Budgeted) Income Statement“.


Pro forma (Budgeted) Income Statement

The budgeted income statement summarizes the various component projections of revenue (sales), costs and expenses that have been figured on the previous budgets for the budgeting period. For control purposes, the budget can be divided into quarters, for example, depending on the need.

Here is the “Budgeted (Pro forma) Income Statement” (Please attention on the notes):

Budgeted Income Statement


  • Sales – from the “Sales Budget
  • Variable Cost of Goods Sold – from the “Ending Inventory Budget
  • Variable Selling and Administrative – from the “Selling and Admin Expense Budget
  • Factory Overhead – from the “Factory Overhead Budget
  • Selling and Administrative – from the “Selling and Admin Expense Budget
  • Interest Expense – from the “Cash Budget

On the next page is the final budget: “Pro forma (Budgeted) Balance Sheet“. Read on…


Pro Forma (Budgeted) Balance Sheet

The budgeted balance sheet is developed by beginning with the balance sheet for the year just ended (“Previous Year’s Balance Sheet“), in this example is for the year ended December 31, 2010, and adjusting it, using all the activities that are expected to take place during the budget period.

Here is the “Previous Year’s Balance Sheet“:

Previous Year Balance Sheet

Some of the reasons why the budgeted balance sheet must be prepared are:

  • To disclose any potentially unfavorable financial conditions
  • To serve as a final check on the mathematical accuracy of all the other budgets
  • To help management perform a variety of ratio calculations
  • To highlight future resources and obligations

Here is the Budgeted Balance Sheet as below (please pay attention to the note below the figure):



Cash – From the “Cash Budget

Accounts Receivable – From the “Sales Budget” and  “Schedule of Expected Cash Collections“.
==> Accounts receivable = Beginning balance + sales – receipts
==> $9,500 + $256,000 – $242,460 = $23,040

Material Inventory – From the “Ending Inventory Budget“.

Land – From the “Previous Year’s Balance Sheet” (Unchanged).

Building and Equipment – From “Previous Year’s Balance Sheet ($100,000)” + “Cash Budget ($24,300)” = $124,300

Accumulated Depreciation – From “Previous Year’s Balance Sheet ($60,000)” + “Factory Overhead Budget ($13,000)” = $73,000

Accounts Payable – From:
==> beginning balance + purchase cost – disbursements for materials
==> $2,200 + $19,346 ( see Schedule Expected Cash Disbursement) – $19,082 (see Schedule of Expected Cash Disbursement) = $2,464
==> or 50% of 4th-quarter purchase = 50% x $4,928 = $2,464

Income Tax Payable – From “Budgeted Income Statement“.

Common Stock – From “Previous Year’s Balance Sheet (Unchanged)“.

Retained Earning – From “Previous Year’s Balance Sheet ($37,054)” + “Budgeted Income Statement – Net Income ($35,020)” = $72,074


Budgeting Beyond Basic

Well, that’s a detailed procedure for formulating a basic set of budgets. However, in practice a shortcut approach to budgeting is quite common and may be summarized as follows:

  • A pro forma income statement is developed using past percentage relationships between relevant expense and cost items and the firm’s sales. These percentages are then applied to the firm’s forecasted sales.
  • A pro forma balance sheet is estimated by determining the desired level of certain balance sheet items, then making additional financing conform to those desired figures.

The remaining items, thus, are estimated to make the balance sheet balance. There are two basic assumptions underlying this approach: (1) The firm’s past financial condition is an accurate predictor of its future condition; and (2) The value of certain variables such as cash, inventory, and accounts receivable can be forced to take on specified desired values. This version called “Percent-of-Sales Method”.

If I can manage my time, I will discuss the approach soon in the future. Some issues most probably arise after the completion of the budget. For example: What happened if the actual isn’t the same with the budget? How to make a weekly cash budget, what data would you need to have and how to make the budget (should you take it from the cash budget that you have made for quarterly basis)?. Let’s also include the weekly cash budget steps on the future post. Meanwhile, you may want to try to implement this.



  1. R Sathyamurthy

    Aug 8, 2010 at 8:28 am

    Hi Putra,

    Can I have a PDF of this article? I want to share with my colleagues who do not have internet access.

    Best Regards
    R Sathyamurthy

  2. KFactora

    Aug 10, 2010 at 3:26 pm

    i also want the pdf version of this topic. very helpful!

  3. Neeraj

    Sep 15, 2010 at 12:39 pm

    Please send me this in PDF/Word if available and would like to share as this 1st time when i see details of budget preparing process

  4. Maria

    Oct 20, 2010 at 7:27 pm

    hi also want pdf version of this topic. Thank you

  5. Kasak

    Oct 26, 2010 at 12:49 pm

    Dear Sir,

    Please tell me in the above “Schedule of Expected Collection” in the Ist’s Account receivable $9500 taken?. I tried to find out; but not understood.Please tell me.

    • Thanos

      Jul 13, 2012 at 4:00 pm

      The $9500 is the revenue from last year’s sales that has’t been collected yet and is transfered to the next year.

  6. Raghav

    Feb 11, 2011 at 6:06 pm

    The site is more helpful to accounting family

  7. uddhav

    Feb 15, 2011 at 12:47 pm

    i need the annual budget format ASAP. pls give me…. pls its my humble request.

  8. Lisa

    Feb 16, 2011 at 3:52 pm

    Could I get a .pdf or word version of your article? Could I get a copy of your budget format in excel?
    Thank you kindly.

  9. GG

    Mar 29, 2011 at 6:02 am

    Hi Mr.Putra,

    Very useful website, Please send me the budget sample sheets in excel format and also send the whole article in pdf format so that i will always keep it with me, it is really a treasure… Thanks a lot.

  10. Iksan

    Apr 8, 2011 at 3:03 am

    Please send me the budget sample sheets in excel format and also send the whole article in pdf format thank’s alot


    Apr 13, 2011 at 7:32 am

    Please send me the budget sample sheets in excel format and also send the whole article in excel format thank’s alot

  12. RH

    Apr 13, 2011 at 7:17 pm

    Would you please send me the budget sample sheets in excel format? I would also like the rest of the article in pdf.
    Thanks so much!

  13. mahmoud esam

    Jul 3, 2011 at 7:56 pm

    Hi Mr.Putra,
    thanks for your effort , could i get the pdf version of budget and the budget sample sheet in excel format?
    thanks for you
    mahmoud esam

  14. Jessica

    Nov 8, 2011 at 5:01 am

    Hi Putra,

    Your extensive knowledge in accounting, finance, and tax are impressive. I really appreciate your generosity of sharing these knowledge. May I have the pdf version of this article and the budget sample sheet in excel format?

    Thank you in advance.

  15. Shane

    Aug 12, 2012 at 10:31 pm

    Hi Putra,
    thats is some of the best accounting explaination i have seen in ages… is it possible to get a PDF..
    kind regards

  16. Shah Aziz

    Mar 25, 2013 at 8:29 am

    Many thanks for help , It was really nice and could you please send me ,how to budget the airlines operations , step by step guide in word and calculation of them in excel sheet.
    Best regards,
    Shah Aziz Ghawsi

  17. Vishu

    Mar 25, 2013 at 11:15 am

    Admin,Would you please send me a PDF version of this article…Its a wonderful article on budgeting

    Thank You.

  18. Cassandra

    Mar 30, 2013 at 5:25 pm

    Thanks for the info… Can you please tell me with what figure that you calculated the interest / loan repayment in the cash budget? The assumption stated that the borrowings must be in multiples of $500 and interest rate is 10%. Hpw did you also come about with the borrowing figure? And if the borrowing is $8500 why is it that the 10% interest rate is not $850? I am a bit confused in the financing section of the cash budget…Thanks in advance for your help/

  19. Akanisi Fatafeh

    May 28, 2013 at 3:02 am

    I would appreciate a pdf version. Very informative, educational and systematic. Thank you

  20. Name (required)

    Nov 28, 2014 at 6:54 pm


    i also required budget preparation process ,ploease send it to me also

  21. mika

    Mar 14, 2015 at 9:02 pm

    Hello Mr. Putra,

    Thank you very informative; is it possible to receive this information in PDF and excel to save for my files for later view?

    Thank you!


  22. ed Dacosta

    Apr 17, 2015 at 5:10 pm

    Hello Mr. Putra

    Thank your for this topic. Can I have a pdf file?

    Thank you


  23. angesom

    May 10, 2015 at 3:20 pm

    thank you for this chapter
    please can you send me with pdf budgeting book
    to get more and to all the when I needed bugeting knowlege
    10Q A

  24. Girish

    May 19, 2015 at 11:44 am

    Hi Putra,
    It is very useful and can you send me in excel format.
    Thanks In advance.


  25. brewster

    Jun 3, 2015 at 8:13 pm

    Hi mr Putra,
    Would love to have a pdf of the article

  26. maame

    Nov 8, 2015 at 6:05 pm

    Thank you so much for this. Can u pls send me the Pdf verson and sample budget in excel format if that is possibble

  27. Birhanu Gebru

    Nov 27, 2015 at 12:16 pm

    Dear putra! how are you doing?
    it is really very help ful. but i want further explanation on finance section of cash budget, specially what is meant by multiples of 500? where does 8500 come? if borrowing 8500, how interest at 10% annually could be 425?

    best regards

  28. Kenneth Adu Agyei

    May 19, 2016 at 8:13 am

    I really appreciate your effort of this article. please can you send to me a PDF version and a sample budget in excel format because is very very helpful in my business circle. thanks a lot

  29. dima

    Jun 15, 2016 at 7:42 am

    wow so nice, I am a CPA student and need a help on PDF article if possible.

  30. mark

    Jul 8, 2016 at 8:12 am

    Useful data can i get it in excel format

  31. Jan

    Sep 27, 2016 at 11:59 am

    could you plzzzz explain the Borrowings and Repayments part.

  32. Wole Oja

    Oct 11, 2016 at 1:06 pm

    Please just read the article but will like others request the excel of the examples and the pdf of this article to read without internet.

  33. lampton er

    Nov 22, 2016 at 9:00 am

    Give a format sample budget please

  34. Monir

    Jan 6, 2017 at 1:26 pm

    Hi Dear Putra. It is very helpful. Could I have a pdf and excel format.

  35. yesu

    Feb 4, 2017 at 11:12 am

    Please send me the budget format in excel, and also I am requesting you to send any live budget prepared by you.

  36. Tesfaye Demissie

    Feb 14, 2017 at 11:05 am

    thanks a lot

  37. Ashwini Kumar

    Feb 16, 2017 at 6:05 pm

    Hi this is very helpful note. need a help on PDF article if possible.

  38. shantha

    Mar 1, 2017 at 5:23 am

    Please send me the budget format in excel,

  39. Enny

    May 12, 2017 at 11:57 pm

    Thank you for the spectacular article.

  40. thirumalai

    Jun 28, 2017 at 1:53 pm

    Please send me the budget format in excel,

  41. Pascal

    Oct 10, 2017 at 6:44 am

    please would you please send me format with items of budget preparation even cash budget especially classified in quarter
    thank you


    Oct 23, 2017 at 2:14 pm

    really appreciate your effort of this article. please can you send to me sample budget in excel format

  43. Jaleh

    Nov 15, 2017 at 11:43 am

    can you send me the cash budget example ? there is no picture inserted as an example. thankyou

    • Aria

      Feb 21, 2018 at 1:28 pm

      Hi, an I also have a PDF of this? Thank You!

  44. Israel Akinnuwesi

    Dec 28, 2017 at 3:21 am

    Very educative and easy to learn. Good material for students. Keep up the knowledge.
    Israel, Lagos Nigeria

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