While accounts are used to show what has happened in a business, a budget is an attempt to predict what will happen.
A budget is a plan that shows how much money you expect your business to earn and spend in a given period, for example a month or a year.
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Why is a budget important?
A business will set up a budget to be able to predict what will happen in the future and to make plans, such as how much to charge for goods and services, when to purchase new equipment and what type of offices you can afford to rent.
For example, if can see that you’re going to be earning a lot in May, you can take that opportunity to purchase a new work laptop, for example.
You also use it to work out your break-even point.
See also: How to create a budget
What types of budgets are there?
There are some budgets you really should set up for your business in order to ensure success. The most common types of budgets are cash flow budgets and profit budgets—sometimes called operating budget.
Cash flow budget
This gives you an overview of your predicted receipts and payments within a period, for example a month or three months. Setting up a cash flow budget is the best way to see if you are going to have enough money to pay your bills, because it shows how much money you are going to get and how much you have to pay.
Profit budget
This lists expenses and income. This helps you see if your business is making money. It also gives you an idea of how much you have to pay in taxes.
Usually, it’ll cover a calendar year at a time, but you can also set it up for a shorter period if you need.