Cash flow forecast and the Budget. What’s the difference?
Every year businesses should produce a budget and a cash flow forecast.
They have a lot of things in common. The cash flow forecast tends to follow the budget.
Both are essential aids in running a successful business and to our mind are not optional.
So why are the numbers different?
- A budget is based on accrual accounting. That means we are budgeting for when we raise an invoice, or receive an invoice. Notice this has nothing to do with being paid, or paying a supplier. That’s what the cash flow forecast is for. For instance, you might raise an invoice for a customer in March and get paid by them in May. The budget would include the invoice raised in March and the cash flow statement would include the cash coming into the company in May.
- Budgets for GST registered companies will have figures that exclude GST.
- A budget is normally based on a profit and loss account. Revenue less expenses equals profit. As such, it will exclude cash paid for capital purchases like vehicles or property. Some people produce a capital budget for this purpose. However, if you are financing an asset, the interest on this finance will normally be included in a budget.
Cash Flow Forecast
- A cash flow forecast is based on cash accounting. That means that we are forecasting when we will receive money from a customer or pay money to a supplier, or Inland Revenue.
- Cash flow forecasts show money ‘flowing’ into the business or ‘flowing’ out of the business. As such, the figures include GST.
- Adjustments such as depreciation are excluded. The cash flow forecast is only interested in cash coming in or out of the business.
- A cash flow statement will include capital purchases, whether paid in cash or financed. In the case of financing, it will include both the capital repaid along with any interest.
- A cash flow forecast will forecast how much cash you should have in any particular month.
There are a couple of key tools to help you with your budget and cash flow forecast.
Budget Manager enables you to record your budget in Xero. You can then run the budget variance report to help key yourself on track. It will show how your actual performance varies against the figures your anticipated in the budget. It’s an early warning system and essential for any business. You can read more about budgeting in Xero here.
Float is an excellent tool for managing cash flow and connects to Xero. Actual income and expenses flow into Float to ensure that it is continuously updated. There is no need to wrestle with spreadsheets and spend hours a day updating everything.
You can see an introductory video on Float here.
Need some help?
Generate Accounting specialises in helping business with budgeting and cash flow forecasts. We can also help set up these tools in the software. Contact us today for a confidential chat.