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. 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
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:
Ø Debtor Days
Ø Creditor Days
Ø Inventory turnover days
Ø 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.