They may sound boring or too hard or scary, but a cash flow forecast and a budget show similar information, so what are they and how are they different? There is a difference and each have different uses, but mainly they help the business owner in the financial management of the business or organisation.
Cash flow forecast – is an estimate of the amount of money (actual cash) you expect to flow in and out of your business and includes all your future income and expenses. A forecast usually covers the next 12 months, or it can also cover a short-term period such as a week or month.
- It predicts when the actual income and expenditure occurs in the actual bank account(s).
- Does not consider accruals and adjustments such as depreciation, only ACTUAL cash in and out
- 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 –fully paid or the instalments on loans/finance
- 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
- More info and a handy Free template – http://www.business.vic.gov.au/money-profit-and-accounting/getting-paid-on-time/cash-flow-statement-projection-with-template
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). It is used to measure how you go against the budget – are you on track for what you want to achieve?
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.
- Some further information is here – http://www.infoentrepreneurs.org/en/guides/budgeting-and-business-planning/
Both Cash Flow and Budget detail the planned financial goals the organisation is trying to achieve and are linked to the strategic and business plans of the organisation. The main difference is based on:
1. The type of the transaction and;
2. 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.
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