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Budgets are used as a planning tool to plan and predict future income inflows and expenditures.  They are also used to benchmark performance as a point of comparison between expected and actual income and expenditure.

Budgets should also be used when applying for financing using various projection periods.  Budgets are also used to represent what you plan to use the financing on in order to maximise your business' success and generate a positive net income.

To budget you must first determine your business start-up costs and the business operating costs for the initial years of operating. You should maintain some slack in your business budget to accommodate any unforeseen spending such as when an emergency or a good opportunity arises. It is important, however, not to be too optimistic when budgeting, be realistic particularly in respect of business sales.

There are many types of budgets available to operate a business, including the three key budgets outlined below:

• Projected Income Statement: This employs the profit and loss statement where you budget for total business sales and expenses for the projection period.
• Projected Balance Sheet: This budget employs the balance sheet to project the business' assets it needs to operate and the amount of liabilities the business expects to incur during the period, including creditor claims.
• Cash Flow Budget: This employs the cash flow statement to enable you to plan and represent your expected cash inflows and outflows.