Explaining the difference
The difference between a budget and a cash flow forecast can sometimes be confusing. They can seem to show similar information yet both are very different and have different uses. Both are essential tools for the accurate financial management of your business.
A budget details what you plan to do with your finances for a relevant period of time. This is usually over 12 months, but can be longer or shorter depending on future circumstances, and focuses on profit.
In addition, a budget will usually also have the following attributes:
- Accruals and other non-cash adjustments such as depreciation are often included.
- A Budget also reflects the planned objectives of what the business is trying to achieve and is linked to the strategic and business plans.
- A budget also provides a benchmark to then monitor business performance against. After each month you can compare what actually occurred against what was budgeted or planned to occur and make adjustments accordingly.
- Usually the full year budget is broken down into months.
It is important to note that a budget is not used to monitor the amount of cash in the bank accounts. That is where the cash flow forecast comes in. A cash flow forecast details when the actual receipts and payments are likely to occur and is a way to predict the actual cash position a business will be in at a given point in time.
Some important attributes of a cash flow forecast:
- A cash flow forecast reflects when the actual income and expenditure is transacted into/from the actual bank account.
- It is not based on accrual accounting and non-cash adjustments such as depreciation are excluded.
- The full year cash flow forecast is mostly broken down into a month by month basis. But in some instances it can be further broken down into fortnightly or even week by week depending on the circumstances or individual needs of the business.
Main Differences
The main difference between a budget and a cash flow forecast is based on:
1. The type of the transactions included; 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 into your bank account.
This is where it becomes important to know the average time your debtors take to pay after being invoiced. Often it will not be by the due date so if you know the average days it takes for you to receive payment, allowances in the cash flow forecast can be made accordingly.
Key Performance Indicators (KPI’s)
This also highlights the value of knowing some important Key Performance Indicators (KPI’s) that are relevant for your business and industry such as:
- Debtor Days
- Creditor Days
- Inventory turnover days
- Working capital ratio
Once you understand the differences between a budget and a cash flow forecast you will be well on your way to managing your finances and feel more in control of your business.
Remember, a good bookkeeper should be able to help you with monitoring your business budget and cash flow. They should also be competent enough to keep an eye on the KPI’s that are relevant to your business and alert you to any issues that may need attention.