It is often confusing as to the difference between a budget and a cashflow forecast. They seem to both show you similar information yet are both very different and are used in different areas of your business. Both a budget and a cashflow forecast are vital for the accurate financial management of your business.
Characteristics of a Budget:
- It reflects what you plan to do with your finances for a specified period of time;
- Can be prepared on a monthly basis, 12 months in advance or on a weekly budget, say six months in advance;
- Focuses on profit;
- Different adjustments (non-cash) are often included such as depreciation;
- Details the planed objectives of what your business is trying to achieve and is linked to the strategic and business plans of the company;
- Provides a benchmark or target to base the business performance monitoring around. You can compare what you expected/wanted to happen with what actually happened for any particular month/year etc; and
- NOT used to monitor the balance of cash in bank accounts
Characteristics of a Cashflow Forecast:
- It reflects when the actual income and expenditure are likely to occur;
- Details when the money will enter your bank account and when it will leave;
- No non-cash adjustments such as depreciation are included in a cashflow forecast;
- Purchase of capital equipment such as machinery, office fitouts and motor vehicle purchases are included in the cashflow forecast, even though they are excluded from the profit and loss. This is because a purchase of such capital items will involve cash out flows in the form of cash deposits and or finance repayments; and
- The full year cashflow is usually broken down into months but some businesses will find it more beneficial to prepare their budgets on a fortnightly or weekly basis.
So what is the main difference between a budget and a cashflow forecast? The type and timing of transactions. To better illustrate this, consider this:
A budget will record the income at the time you send out an invoice whereas your cashflow will record when you actually receive the payment into your bank account.
It is at this point where it is important to consider when your customers will pay you. It is quite common for businesses to have customers who will pay after the due date of their invoice so it is important to understand your “average debtor days” in order to prepare your cash flow as accurately as possible. This will indicate to you on average, how many days after invoices are sent, is payment received.
If you can understand the differences between a budget and a cashflow forecasts you will be well on your way to managing your finances effectively.