Understanding The Difference Between A Cash Flow Forecast And A Budget
When you start out running a business, it is important that you understand some of the terms which you may come across. A cash flow forecast and a budget are two references which we will explain in more detail so you can have a better handle on the management of your finances.
While there are some similarities between your cash flow forecast and budget, they are slightly different with specific uses and benefits. Both are used to further your business objectives and positively grow your business. Let’s break it down a little more.
What is a Cash Flow Forecast?
Your cash flow forecast allows you to plan out when you have cash and when you don’t. It explains when cash is going in, and cash is going out to help you budget accordingly. It lets you see when you will have money in the bank and take into account any loans or payments which need to occur over any given month. Your cash flow forecast can be easily updated each month to show what is in your bank account versus any project spends (fixed and variable) and income to be received.
What is a Budget?
Your budget is slightly different to a cash flow forecast as it details what you plan to do with your finances taking into account sales and costs over a particular period. It is very similar to a balance sheet but has more of a focus on your overall profit with an emphasis on forward projection. Large purchases and depreciation will be included in the equation. Your budget is particularly helpful to act as a benchmark against your business performance. Your budget should always focus on what is in your account without going into unnecessary credit where possible.
A budget is not used to keep track of the amount of cash in your bank account. That is where your cash flow forecast comes into play. It is important to note that a budget will record dates of income, while the cash flow forecast will focus on when the money will enter your bank account.
Your overall aim is to achieve positive cash flow so you can save, invest or grow your business. Keeping these statements up to date and having a budget which is easy to maintain can influence your spending and savings in the long term.