What is a purchases budget?
A purchases budget report allows business owners to determine how much money and goods are needed to reach desired goals. This particular budget is used for companies that have products in stock or inventory, as the value of inventory plays a large role in a complete purchases budget.
Calculating Purchase Budget
A purchases budget provides a representation of what the business plans to buy for the inventory and how much inventory it plans to grow or hold over a given period of time. A purchases budget is created by using a simple formula. The formula is the desired ending inventory plus the cost of goods sold minus the value of the beginning inventory. This equation gives you the total purchases budget. For example, if you want £6,500 worth in ending inventory and your cost of goods sold is around £1,950, add these two values and subtract the value of your beginning inventory from the £8,450 total, according to the equation. If the value of the beginning inventory is £1,300, for example, the final amount if your total budget will be £7,150.
Cost of Goods Sold
The cost of goods sold is a collected sum of all products or services offered by the company in terms of the production value. This means that the sum is a total of products costs plus the means to get it ready for sale, for example. Some companies will even break it down and explain how the cost is divided up in terms of planning, production and testing, for example.
Purchases Budget Purpose
A purchases budget is created to keep track of the business' inventory value and the amount of goods sold. It is also used to help you keep track of your desired ending inventory value each month, since this is often a goal set by business owners. The purchases budget is often just a partial budget for a business and is often found in a business master budget.
The specificity of the purchases budget allows business owners to use the information to plan the inventory. The purchases budget is often a single component of a larger inventory and purchase budget for a business, as this particular budget focuses on the value and growth of inventory. It also helps plan for future purchases of goods.