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Unlike accounting, which tells what has happened financially in a company, a budget is an attempt to predict what will happen.
It is a plan or statement that shows expectations of income and expenses in a given period, whether it is a monthly budget or a whole year.
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What’s the purpose of a budget?
A company sets up a budget to have an element of predictability and make plans for further operations. If one knows about large expenses that are coming, it can be useful to budget for this so that necessary adjustments can be made in good time.
What types of budgets are there?
Your company should set up some budgets to succeed. The most common ones are the cash flow budget and profit budget. A profit budget is also called an operating budget.
Cash flow budget
The cash flow budget shows an overview of planned receipts and payments in a future period. It is the best way to see if you are going to have enough money to pay your bills in the coming time because it shows how much money you are going to have in relation to what you have to pay.
You can set it up for a few months at a time.
Profit budget
The profit budget is also common. It shows expenses set against income. Then you find out if the company is making money, and if you are going to have a surplus or a deficit. It also gives an idea of how much you have to pay in taxes.
Usually, a profit budget is set up for a calendar year at a time, but you can also have a shorter period.