What Is an Administrative Budget?
An administrative budget is an official, detailed financial plan for an upcoming period for a business. An administrative budget is usually prepared on an annual or quarterly basis and identifies the costs of running an operation that is not tied to producing a product or service. This budget includes expenses from non-manufacturing departments, such as sales, marketing, and human resource departments.
- Administrative budgets are financial plans that include all expected selling, general and administrative expenses for a period.
- Expenses in an administrative budget include any non-production expenses, such as marketing, rent, insurance, and payroll for non-manufacturing departments.
- A pitfall of administrative budgets it using past budgets or actual results to prepare the future budget—this perpetuates past spending patterns and should be avoided when possible.
How an Administrative Budget Works
An administrative budget is essentially all planned selling, general and administrative (SGA) expenses for a period of time. In an administrative budget, only non-production costs are accounted for, including supervisor payroll, depreciation, amortization, consulting, sales, dues and fees, legal fees and marketing, rent, and insurance. An administrative budget enables management to exercise control of the day-to-day activities of the business.
An administrative budget deals with the administrative side of running a business. Non-production payroll may include sales staff, accounting personnel, managers, clerical staff, and other support staff members not involved in the production. An administrative budget is a formal breakdown of all planned expenses, allowing managers to make estimations and measure progress.
To measure managerial effectiveness and financial performance, administrative budgets are often analyzed for trends or patterns. A popular technique compares the planned budget to actual business results. Here, a business analyst can identify what is working and what isn't. In theory, management can then allocate resources to their most effective uses.
No two administrative budgets are the same. Their content and composition will change with business conditions and the needs of the parties reviewing them. Large organizations, such as the U.S. State Department, will have administrative budgets that are far more sprawling than a monoline agency's, for example, the U.S. Army Corps of Engineers.
Administrative Budget vs. Production Budget
The administrative budget is for most things not related to manufacturing or production. This budget can be more than the budget for production. Both these types of budgets can be created for the month, quarter, or year (or virtually any period). The administrative budget can be broken down into separate budgets so that sales and marketing are also included.
Criticism of Administrative Budgets
An administrative budget are usually derived from past periods. For example, a business might use a previous budget or recent actual results to create the upcoming budget. The downside to this is that past spending patterns can be perpetuated. In many cases, it’s best to create administrative budgets on planned actual spending, limiting extrapolation of the past to a minimum.