What’s the difference between a budget and cashflow, and when to use them? (2024)

In this edition of our Business Lifecycle Series, Kerry Bebendorf, Partner and Business Advisor at Moore Australia (QLD/NNSW) explains the difference between a budget and cashflow, and what affects each of them.

What is a budget?

A budget is usually a 12-18 month projection of revenue and expenses, estimating expected profit over this time. It should be linked to your strategic and business plans and can include performance benchmarks, for example sales targets. The focus of a budget will be on profit.

To prepare a budget, you look at your previous performances and business results, your projected growth for the upcoming period and add inflation. In most cases, budgets are prepared for periods of 12 to 18 months.

What is revenue and how to calculate it

Revenue means money coming in through the sale of goods or services and is calculated by adding up everything you have sold. If you are forecasting revenue, you calculate how many hours of service or units of products you expect to sell in the upcoming budget period. Adjustments to revenue can be made by changes in price per hour or unit or the number of hours or units to be sold over the period. This will affect the total profit for the period.

What expenses should I expect, and should they be part of the budget?

All of your expected business expenses should be part of your budget. Major expenses of a business are often rent and salaries or wages which will make up a large portion of your costs. Rent is a fixed expense and can be projected with some certainty. However, salaries or wages may fluctuate due to the state of the economy and may also be closely linked to changes in revenue projections.

For example, if you increase the number of units or total number of hours to be charged, you may require more employees to achieve the increase in revenue. Therefore, you must factor this into the wages expense in your budget. From there you will need to calculate the increase in other employee costs such as superannuation, workers’ compensation insurance and payroll tax.

Should my business budget be a secret?

Although some aspects of your budget will be confidential, such as the itemised salaries of staff, your budget is a document that should be discussed with your team and referred to regularly. Each month budgeted or projected figures should be compared with actual sales or results data and then revised. This will help ensure that any major deviations from budget are taken into account and the total projected profit is adjusted accordingly.

Monthly budget meetings are also a good time for your relationship managers to highlight any major changes with your customers, which might have an impact on your sales figures. For example, if your customer is having difficulties, this may have long term consequences for your projected sales figures.

A review of expected profit is then linked back to your strategic and business plans and any impact recorded as necessary.

What is a cashflow forecast?

A cash flow forecast is a projection of receipts and payments (in contrast to a budget that focuses on revenue and expenses) and the timing on when they are likely to occur. Cash flow is paramount to the continuing viability and operation of a business. A cash flow forecast will also include timing of cash movements that aren’t recorded in the budget such as income tax and GST payments, capital purchases, loan repayments and personal transactions such as dividends to be paid to shareholders.

What’s the difference between a budget and a cash flow forecast?

Where a budget will predict income, a cash flow forecast will estimate when the income will be received. By changing the trading terms (ie the number of days your customers have to pay you for services or products sold), you can substantially affect the cash flow of your business. Ensuring that you communicate your trading terms clearly to customers and monitor your accounts receivable is crucial to your business continuity.

In relation to payments, your suppliers will provide you with their trading terms and it makes good business sense to make strategic use of these. Paying expenses days earlier than is required by your supplier’s trading terms could mean the difference between being able to pay your employees or other critical business expenses as they arise. The aim is to always have a financial buffer in the bank, in case something goes wrong.

What if my business is seasonal?

A cash flow forecast will also assist with smoothing out the seasonal slumps in income or increased expenses, thus allowing continued operation. Some businesses may require assistance from their financier or lender, such as an overdraft, during these times. Your lender will need you to provide a cash flow forecast, to show that any deficit is only temporary and can be repaid with interest within a reasonable period of time.

The short version

The main difference between a budget and a cash flow projection is timing. By preparing both, you are providing a full view of your ongoing business operation. A budget will predict the profitability of your business and a cash flow projection will predict the funds left in your bank account at the end of the period.

Bring in an advisor to make sure nothing is missed

Moore Australia advisors are experts in creating budgets and cashflow projections and can provide as much or as little help as you need.

Budgets and cash flow projections can be complex financial documents. It always pays to bring in an advisor early in the process, to make sure no crucial information is missed and important points are addressed. For further assistance to prepare a budget and/or cash flow projection, please contact your Moore Advisor.