A budget details what you plan to do with your finances for the
relevant period of time. This is usually over 12 months, and focuses on
profit. In addition:
- Accruals and other non-cash adjustments such as depreciation are often included
- A Budget also reflects the planned objectives of what the organization is trying to achieve and is linked to the strategic and business plans.
- A budget also provides a benchmark to then monitor performance. After each month you can compare what actually occurred against what was budgeted or planned to occur
- Usually the full year budget is broken down into months
A budget is NOT
used to monitor the amount of cash in the bank accounts.
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.
That is where the cash flow forecast comes in.
A cash flow forecast details when the actual receipts and
payments are likely to occur.
· 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 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
The main difference between a budget and a cash flow
forecast 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 into your bank account.
One point worth mentioning is 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 also highlights the value of knowing some
important Key Performance Indicators (KPI’s) such as:
·
Debtor
Days
·
Creditor
Days
·
Inventory
turnover days
·
Working
capital ratio
Understand the difference between a budget and a
cash flow forecast and you will be well on the way to managing your finances.
This information can be
found on the Calxa website: www.calxa.com.au