People often ask me the difference between a budget and a cash flow forecast. You will see many clever definitions of each but, simply put, a budget is about profit and the cash flow forecast is about cash.
An example. A business may sell 20% of its goods on a retail basis with payment at the time of sale. Of the remaining 80%, half (40% of the total) will be paid for next month, most of the rest the following month and the remainder the month after that. In a budget, the total sales will show in the month in which the sales were made. In a cash flow forecast, the sales will show in the month in which the cash is expected to be received. Sales of £10,000 would be shown as follows
With expenses, the same principle applies. When preparing a budget, the amount is shown in the month in which the expense occurs but in a cash flow forecast, it will be entered in the month in which payment is made. With rent, for example, the payment may be made quarterly and entered four times a year on a cash flow forecast. The cost relates to each month of the year so, in a budget which is looking at the profit that has been made that month, a third would be entered in each of the twelve months.
We also need to consider VAT. In a budget, the figures are shown net of VAT as this tax does not affect the profit of the business. In a Cash Flow Forecast, however, we are looking at the effect on the cash in the business so all figures are entered gross, including the VAT paid and received. There will also be a line to show VAT paid (or refunded!)
It helps to write down the assumptions made in this calculation. This is useful in establishing the same pattern in different lines and will help when looking back to see how close to reality the calculation was and in looking forward for the next year.
Preparing budgets and cash flow forecasts can be very powerful in helping a business to move forward. If you would like to see how this may help your business, talk to White Egret Limited now.
Free advice is available from White Egret Limited. We are pleased to offer a free initial session to talk about the general issues facing the business and to see in what ways we can help and assist. There is no obligation on either side but we are always happy to chat; call or e-mail today.
Julie Leigh julie.leigh@whiteegret.co.uk 01202 768574 07940 983132
