While it can be said there are similarities between a cash flow forecast and a budget because they seem to show similar information, be aware there is a difference and each method has different uses. Both are great tools in the accurate financial management of the business or organisation.
Cash flow forecast – shows details of when the actual cash – receipts and payments are planned and expected to happen.
- It predicts when the actual inflow and expenditure occurs in the actual bank accounts.
- It doesn’t consider accruals and adjustments such as depreciation, only the 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, showing HOW they will be paid – eg show loan money inflow and payments out
- The full year cash flow forecast is usually shown on a month by month basis, or can be broken down into fortnightly or even weekly depending on the requirements
Budget – shows 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 usually prepared over 12 months, and focuses on profit. In addition:
- Accruals and other non-cash adjustments such as depreciation are included
- Large capital purchases are be included
- A budget also provides a benchmark to then monitor performance – after each month’s 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 above comes in.
Both Cash Flow and Budget reflect the planned objectives the organisation is aiming 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
For 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.
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 40-64 days after sending out the invoice. This would be reflected in the cash flow, but not the budget.
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