So, what is a Budget?
A budget is a detailed plan that outlines the business’ expected income and expenses over a specific time, usually over a 12-month period. It serves as a financial roadmap, to guide spending decisions and support the financial goals of the business. Budgets are forward-looking and are based on estimates and projections.
They are usually calculated, firstly on the actual income and expenditure for the preceding few months, and then forecast for the next 12 months, with assumptions based on expected expenses and goals for business growth. As an example, salary expenses may be budgeted at $100,000 per month, but you may already know that this will increase to $120,000 in December to account for extra staff needed over the Christmas holidays, or maybe because employees are taking annual leave and leave-loading is required, along with public holidays. The percentage increase can also be based on the previous year’s fluctuations at the same time.
Key Components of a Budget:
- Income: The expected revenue from various sources, such as product sales, investments, services provided, consultant fees, interest and more.
- Expenses: Anticipated costs include fixed expenses like rent and software payments, and variable expenses, including utilities, running costs and cost of sales, as well as discretionary spending, like entertainment and travel. Note, wages and salaries are included in expenses, and depending on the business, they may be variable or fixed costs.
- Savings and Investments: Budgets also allocate for funds in savings accounts, retirement plans, and other investment vehicles.
- Debt Repayment: Budgets factor in planned payments towards any outstanding debts, such as loans or credit cards.
Budgets are usually calculated without including the GST, but do take into account any income tax or payroll tax payments, and when they are due to be paid.
Remember - it’s important to monitor your budget against your actual operating figures, on a monthly or quarterly basis. What’s the point of having a budget if you don’t use the information efficiently and effectively? Accounting software these days allows for easy access to this information by running Budget Variance reports, giving you vital information at your fingertips.
And what is a Cashflow Forecast?
A Cashflow Forecast, on the other hand, is a measure of the actual inflow and outflow of cash within a business, usually over a shorter period, like three months. It reflects the general liquidity of the organisation, showing how well it can cover its immediate financial obligations. Cashflow Forecasts are generally looked at and updated more regularly to monitor the resources of the business, so there are no big surprises or unexpected expenditures.
Key Components of a Cashflow Forecast:
- Cash Inflows: Actual money expected to be received, such as sales revenue, as invoices due, loan proceeds, or income from investments.
- Cash Outflows: Actual money spent, including operational expenses, loan repayments, capital expenditures, and tax payments.
Cashflow Forecasts do take into account the GST received, along with PAYG and other tax payments to be made.
Key Differences Between Budgets and Cash Flow Forecasts
A budget focuses on planning and setting financial goals. It helps in predicting future financial positions and making informed spending decisions. A Cashflow Forecast has a specific purpose and concentrates on tracking and managing liquidity. It ensures that there is enough cash available to meet immediate and short-term obligations.
A budget is generally created to cover a longer period, such as a quarter, or year, while the Cashflow Forecast can be monitored over shorter intervals, providing a snapshot of the current financial status.
Budgets are based on estimates and assumptions about future income and expenses, while Cashflow Forecasts are focussed on actual transactions, reflecting real-time financial activity.
How Budgets and Cash Flows Work Together
Both budgets and cash flows are essential tools for effective financial management, and they complement each other. They are both great resources to demonstrate you are in control of your financial management, with a budget setting a clear financial goal, and your Cashflow Forecast allowing you to monitor and track your progress.
Once you have a solid cashflow forecast template, it is easy to complete on a monthly, or even weekly basis. You can see when to expect your income into the bank, when your liabilities and other expenses are due, and most importantly, assess whether you may be hitting a cashflow crunch in the short-term future. Knowing when there are peaks and troughs in cashflow is paramount to ensuring your business remains viable and will continue to thrive into the future.
Use your Cashflow Forecast and analysis to monitor your actual financial activity. Compare it against your budget to see how well you're sticking to your plan. Make adjustments to your budget, if necessary, based on your cash flow.
Comparing and monitoring your budget and cashflow forecast will immediately highlight budget blowouts that can be addressed. It’s easy to see that regularly reviewing both your budget and cashflow forecast will help in identifying areas where you can cut costs, increase savings, or make better investment decisions. It provides a holistic view of your financial health and allows for more strategic financial planning.
Budgets can also be tweaked throughout the year, particularly if there are substantial increases or decreases in any area of the business, such as that million-dollar sales contract you just won!
One specific area, where a Budget and Cashflow working together can make a noticeable impact, is on project-based income. If your business runs projects over the course of months, or even years, you may need to procure materials or expend on labour before claiming progress payments. Preparing project specific budgets and cashflows will assist in keeping the project on track, along with the added benefit of running a project specific cashflow to ensure your project is always cashflow positive.
I hope this blog has confirmed for you, that preparing Budgets and Cashflows for your business is an essential tool in successful financial management. If you need any support with budgets or cashflow forecasts for your business, reach out to Sue at WestBAS – we’re happy to help!