What type of budget is a cash budget?

1. Career development
2. Understanding the Types of Budgets in Accounting

By Indeed Editorial Team

Published April 13, 2021

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Using a budget in accounting can help a business or individual save money by sticking to strict spending rules. Budgets can be simple spreadsheets or organized with accounting software. The key to making a budget work is learning to understand the numbers and sticking to the budget throughout the year. In this article, we'll look at why budgeting in accounting is important and the types of budgets in accounting.

Read more: Why Budgeting Is Important (Plus 7 Benefits of Budgeting)

Why is it important to budget in accounting?

Creating a budget for your household or business expenses helps track costs and income in a more organized way. Budgets can benefit businesses of all sizes, and most businesses utilize a budget to keep finances organized and make tax filings simpler. In a budget, you list out individual expenses, subtract costs, and work toward financial planning for the future.

Budgets can cover general expenses or individual costs. For example, a business that's looking to expand its workforce and add an entirely new department might need a master budget that includes an operation and labor budget. Master budgets encompass all the more focused budgets in a business for the sake of providing a "big picture" look at a company's expenses.

Types of budget in accounting

There are dozens of types of budgets for accounting to consider, with many of them available online as downloadable templates. Businesses often employ budgeting software for a more hands-off approach to tracking expenses, but it's still good to know what kinds of budgets are available. Here are some types of accounting budgets:

1. Basic budget

• Purpose: The purpose of a basic budget is to map out simple expenses and income. A basic budget can be created in a spreadsheet or using a template, and is great for home or business budgeting.

• Advantages: Basic budgets are simple and flexible, and can be used by most people with ease.

• When to use: You can use a simple budget when you need to map out simple accounting information like household expenses or small business expenses.

2. Short-term budget

• Purpose: A short-term budget is designed to help a business or individual plan for short-term expenses and manage funds in a shorter time span. This can be anywhere from a week to a few months.

• Advantages: A short-term budget provides a more focused look into short-term expenses, budgeting goals and short-term income sources.

• When to use: Short-term budgets are great for upcoming large purchases or paying down short-term debt.

3. Fixed budget

• Purpose: The purpose of a fixed budget is to control costs when income and expenses aren't expected to change in the short-term.

• Advantages: The fixed budget has the advantage of providing a simple picture of fixed expenses and incomes.

• When to use: A fixed budget can be used for everyday expense and income tracking when you're not expecting any changes in either.

Related: What To Include in a Budget

4. Cash budget

• Purpose: The purpose of a cash budget is to plan for cash inflow and outflow for a specific period of time, usually in the short-term.

• Advantages: A cash budget has the advantage of focusing solely on cash inflows/outflows for a more specific financial picture.

• When to use: You can use a cash budget when you're expecting a larger volume in cash inflow or outflow.

5. Flexible budget

• Purpose: The purpose of a flexible budget is to plan for different levels of activity in expenses or incomes in the short or long-term.

• Advantages: A flexible budget brings more flexibility to the budgeting process, planning for varying activity levels in the company or individual's financial picture.

• When to use: A flexible budget is generally used when you're expecting different volumes for income and expenses. For example, if a business is going through an expansion phase or an individual is switching jobs and reducing debt.

Related: How To Design a Marketing Budget

6. Functional or operation budget

• Purpose: An operation or functional budget applies to one specific operation of a business and is part of the master budget.

• Advantages: The advantage of a functional budget is that it only applies to a specific department, operation or function of a business instead of the business as a whole.

• When to use: This is a good option for when you're overhauling a specific department or function of the business or you need a better picture of what that specific function/department is costing the business.

7. Master budget

• Purpose: The purpose of the master budget is to encompass smaller operation budgets and provide a larger picture of individual expenses and incomes.

• Advantages: Provides a generalized picture of expenses as a whole.

• When to use: Businesses can utilize a master budget to plan for general expenses and identify costs at a glance.

Related: How To Make a Budget for a Startup

8. Performance budget

• Purpose: The purpose budget is designed to analyze the performance of a specific aspect of a business and determine whether the cost is worth the output.

• Advantages: A performance budget has the advantage of being focused on a specific aspect of a business and can help determine if what's being put in is creating an ROI.

• When to use: Performance budgets can be used to identify costly methods of production and determine if certain functions are creating an ROI.

9. Static budget

• Purpose: The purpose of a static budget is to account for static expenses that won't change.

• Advantages: Static budgets allow for a focused look at fixed expenses that remain constant despite fluctuations in sales volume and revenue.

• When to use: Can be used for static expenses. For example, a shoe factory might use a static budget to account for warehousing expenses on an annual basis.

10. Labor budget

• Purpose: Tracking the cost of labor in relation to revenue.

• Advantages: Part of the master budget, the labor budget focuses solely on labor for a more specific view of an individual expense.

• When to use: Businesses can use labor budgets to track general labor costs or plan for upcoming reductions or increases in labor needs. For example, a retail store might use a labor budget to plan for the busy holiday season.