Definition: A line item budget is a forecasted financial report that describes both different income sources and expenses, grouping them according to their nature. This budgeting technique allows the analyst to identify potential areas that can be downsized or improvement opportunities within the income section.
What Does Line Item Budget Mean?
Budgets are well-known financial tools that allow companies to list both their income and expenses in order to calculate the business potential profitability. Additionally, budgets also illustrate certain realities of the company that allow decision-makers to act properly in order to increase the business performance.
Companies regularly report their historical results through financial statements and these serve as the baseline to develop forecasted budgets. Since accounting standards demand that financial reports are presented in a way that they can be compared, expenses and income sources that are very similar in nature are grouped together to allow business owners and executive to analyze the company’s performance more easily.
This is also the case for line item budgets, where expenses are grouped together in broad categories like sales and marketing expenses or maintenance expenses, to develop easy-to-understand budgets. These reports should also be presented comparatively, by adding historical results right next to forecasted ones.
Example
Long Island Skate Shop is a store that sells equipment and clothing for skate lovers. The company recently received its last year’s financial statements and according to this report revenues were $2,950,000 with a gross profit of $1,200,000; sales and marketing expenses were $253,000 and general expenses $121,000. This led to a net profit of $826,000. The owners are currently developing next year’s budget and they decided to do so by using these categories as the budget’s lines.
They forecasted revenues at $3,400,000 with a gross profit of $1,942,000; sales and marketing expenses are expected to be $431,000 and general expenses $210,000, resulting in a net profit of $1,301,000. Which is a 57.50% more than profits obtained last year.
