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Thursday 12 September 2013

Calxa – animating budgets & cashflow forecasts

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 for the accurate financial management of your organisation.

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

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:

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.

1 comment:

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