There are similarities between a cash flow forecast and a budget as they seem to show similar information, yet there is a difference and each have different uses. Both aid you in the accurate financial management of the business or organisation.
Cash flow forecast – details when the actual cash – receipts and payments are planned and expected to happen:
- It predicts when the actual income and expenditure occurs in the actual bank account;
- Does not consider accruals and adjustments such as depreciation are excluded, only ACTUAL cash in and out;
- However large capital purchases such as assets (usually not recorded in a profit and loss and budget) are included in a cash flow forecast, as to HOW they will be paid – eg show loan money in and payments out;
- The full year cash flow forecast is usually shown on a month by month basis. But in it can be broken down into fortnightly or even weekly depending on the requirements.
Budget – details overall what you plan to do with your finances based on expected sales and expected costs, and is similar to Profit and Loss (and a Balance Sheet)
This is usually over 12 months, and focuses on profit. In addition:
- Accruals and other non-cash adjustments such as depreciation are included;
- Large capital purchases will be included;
- A budget also provides a benchmark to then monitor performance – after each month accounts are finished we compare what actually occurred against what was budgeted or planned to occur;
- Usually the full year budget is prepared in months like the Profit & Loss;
- A budget is NOT used to monitor the amount of cash in the bank accounts – that is where the cash flow forecast comes in.
Both Cash Flow and Budget reflects the planned objectives the organisation is trying to achieve and are linked to the strategic and business plans of the organisation. The main difference is based on:
- The type of the transaction and;
- The timing when receipts and payments will occur.
As a simple example: A budget will record the income when you have sent out the invoice whereas your cash flow will record it when you actually receive the amount in your bank account. Always remember not to assume that debtors will pay the following month. Often it may be later which is why it is important to know your Average Debtor Days which may show that payment occurs typically 64 days after sending out the invoice. This would be reflected in the cash flow, but not the budget.