Cash Flow Tip – Budgeting Compared to Cash Flow – How are they different?

Budgeting and Cash Flow may sound too hard or scary, but cash flow and budgeting can show related information - so what are they and how are they different? There is a difference and each have different uses, but generally, they both help the business owner in the financial management of the business or organisation.

Cash flow forecast –This is an estimate of the amount of money (actual cash) you expect to flow in and out of your business and includes all future income and expenses. A forecast usually covers the next 12 months, or it can also cover a short-term period such as a week or month.

1. It predicts when the actual income and expenditure occurs in the actual bank account(s).
2. Does not consider accruals and adjustments such as depreciation, only ACTUAL cash in and out
3. Large capital purchases such as assets (usually not recorded in a profit and loss and budget) are included in a cash flow forecast, as to HOW they will be paid – eg show loan money in and payments out –fully paid or the instalments on loans/finance
4. The full year cash flow forecast is usually shown on a month by month basis. But in it can be broken down into fortnightly or even weekly depending on the requirements
5. More info and a handy Free template - http://www.business.vic.gov.au/money-profit-and-accounting/getting-paid-on-time/cash-flow-statement-projection-with-template

Budget – This gives detail overall, what you plan to do with your finances based on expected sales and expected costs, and is similar to Profit and Loss (and a Balance Sheet). It is used to measure the actual figures against how you go against the budget – are you on track for what you want to achieve?

This is usually over 12 months, and focuses on profit. In addition:

1. Accruals and other non-cash adjustments such as depreciation are included
2. Large capital purchases will be included
3. A budget also provides a benchmark to then monitor performance - after each month accounts are finished we compare what actually occurred against what was budgeted or planned to occur.
4. Usually the full year budget is prepared in months like the Profit & Loss
5. A budget is NOT used to monitor the amount of cash in the bank accounts. That is where the cash flow forecast comes in.
6. Some further information is here - http://www.infoentrepreneurs.org/en/guides/budgeting-and-business-planning/

Both Cash Flow and Budget detail the planned financial goals the organisation is trying to achieve and are linked to the strategic and business plans of the organisation. The main difference is based on:

1. The type of the transaction; and
2. The timing when receipts and payments will occur.

As a simple example: A budget will record the income when you have sent out the invoice whereas your cash flow will record it when you actually receive the amount in your bank account. Always remember not to assume that debtors will pay the following month. Often it may be later which is why it is important to know your Average Debtor Days which may show that payment occurs typically 64 days after sending out the invoice. This would be reflected in the cash flow, but not the budget.

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Business Tax Tip – How to enter Bartercard bookkeeping accounting (Trade Exchanges)

In our previous post we explained all about how the Australian Tax Office views Barter and Trade Exchanges – in summary you have to record and report as if they were REAL money transactions.

Here is a summary of how to record in your accounts in MYOB, Xero, Reckon, Quickbooks – from the Xero support community –

“Set yourself up a new bank account called Bartercard - there wont be bank feeds but you can then pay invoices from this account and also receive payments into it by completing the payment section at the bottom of an invoice. You could use a spend money to take accounts of the fees.”  Business Buddy.

And further comment -

“Yes simply treat Bartercard exactly the same as any other method of financing, such as a bank account or credit card account. The Bank Feed does work but at month end only and is the easiest way.
As a Chartered Accountant using Bartercard ourselves, and with lots of clients using Bartercard, it is really simple - treat Bartercard income and expenses exactly the same as cash income and expenses, pay/claim GST exactly the same, record income / profits / expenses exactly the same as if it were cash. 
So, although your transaction is similar to acquiring say a stock item for $10k and selling it for $45k, that's a profit of $35k that would hit the P&L. However when the $T (Bartercard Trade Dollars) are spent on (say) accounting fees, stationery, cleaning etc in the business, these expenses are tax-deductible, and if all the $T is spent in the business, this ends up as tax neutral. Other than the cash saving by making these payments in $T instead of cash, that is a real cash profit the organisation has made and like any other profit, will hit the P&L positively.” Ian Malcolm.

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Bookkeeping – Barter Accounting Journal Entries – Bartercard and Trade Organisation Accounting

Is your business a member of a Barter Organisation eg Bartercard in Australia, then note this means you are still required to ensure you are accounting for barter transactions for the sales and purchases as if made by regular cash methods, and GST and tax still applies.

Here is how the ATO (Aus. Tax Office) website explains it as at today –

How barter works

In its simplest form, bartering involves the direct exchange of goods or services for other goods or services without reference to money or money value.

There are sophisticated forms of bartering in the market place, both locally and internationally. These arrangements are typically controlled by member-only organisations, with credit units the medium of exchange.

The terms 'exchange', 'barter exchange', 'trade exchange' and 'countertrade exchange' are used to describe the organisation that manages the bartering operation. Various terms are used to refer to the medium of exchange, such as units, credits, trade dollars or barter dollars. The most commonly used term is trade dollar.

Trade exchange operations vary in size and sophistication, from community-based to business-based operations.

A trade exchange provides its members with a trading account for the purpose of recording member transactions. The trade exchange credits or debits the account each time a member makes a sale or purchase respectively. The account is also debited for fees the trade exchange charges its members. The trade exchange may buy and sell in its own right, acting as a member with its own trading account.

Tax treatment of barter transactions

Barter transactions are assessable and deductible for income tax purposes to the same extent as other cash or credit transactions.

When an entity that is a member of a trade exchange makes a taxable sale to another member, there is a liability for tax, including GST.

Payment may be in money or in kind, or in some instances a combination of these. The payment for sales between members of a trade exchange is the debiting of the recipient's account and the payment received is the crediting of the supplier's account.

Value of supplies made through a trade exchange need to be taken into account when determining whether an entity meets the GST registration threshold and is required to register for GST. For example, if an entity has $60,000 of cash transactions and barter transactions valued at $20,000, it meets the GST registrations threshold.

As a general rule, when valuing the payment arising from barter or countertrade transactions, we will accept a fair market value as adequately reflecting the money value or arm's length value, as applicable. In most cases, we will accept as a fair market value the cash price that the taxpayer would normally have charged a stranger for the services or for the sale of the goods or property.

The rules of most business-oriented countertrade organisations specify a rate for converting credit units into an Australian dollar equivalent. Customarily the rules specify that each credit unit has a value equivalent to one Australian dollar. Where the monetary value worked out using the rate specified in the rules represents a fair market value of the goods or services provided, that rate is to be applied when valuing the payment. In all other cases, a conversion rate that values the goods or services provided at their fair market value is to be applied when valuing the payment.

Transactions where the values are set at artificially high levels for the purpose of establishing an inflated income tax deduction may indicate fraudulent activity. Parties to transactions that involve inflated credit unit values may have consequences other than an adjustment to the amount of income returned or the amount of income tax deductions claimed.

Personal purchases are not deductible for income tax purposes and a GST credit cannot be claimed, whether the purchase is made using trade dollars or Australian currency.

Example: GST payable on a taxable supply between members of a trade exchange

Harvey and Tracey are registered for GST and are both members of the Better Bartering Exchange. Harvey is a bookkeeper and provides bookkeeping services to Tracey who operates a courier service. Harvey's trading account is credited with 440 Better Bartering credits (BBs) for the supply of services to Tracey.

Under the rules of the exchange, one BB equals $1 and the commercial value of the services is $440. The price of the supply is 440 BBs. Before calculating the value of the supply, the 440 BBs are converted to their Australian dollar equivalent ($440). The value of the taxable supply that Harvey makes is $440 × (10÷11), which is $400. The GST on the supply is, therefore, $40 (that is, 10% of $400).

Harvey will declare $400 as assessable income on his income tax return, and Tracey will claim $400 as a deduction on her tax return.

Payments to ATO

Payments to us (ATO) of GST, income tax and the super guarantee levy must be made in Australian currency.

Generally, only other members of the trade exchange and the trade exchange itself may accept payment in trade dollars.

Tax Invoices and ABNs

A tax invoice is required for a barter transaction as it is for any other business transaction. However, where a member of a trade exchange makes a taxable sale and the payment is expressed in credits, the tax invoice must comply with all of the usual requirements for a tax invoice, and include either:

• The GST inclusive price expressed in Australian currency;
• The GST payable in Australian currency.

Australian business number (ABN) obligations apply to bartering transactions to the same extent as for any other business transaction.

Example: Tax invoice

Harvey and Carol are registered for GST. Harvey uses his Better Bartering credits (BBs) to purchase a new computer from Carol for his bookkeeping business. The rules of the exchange specify that one BB equals $1, and the market value of the computer is actually calculated in BB credits on this basis.

Carol issues Harvey with a tax invoice, showing the price of the computer in BBs and the GST payable in Australian currency converted at the rate of one BB equaling one Australian dollar.

If Carol did not quote an ABN, Harvey would be required to withhold 46.5% of the payment and remit that amount to us.

Record keeping

Members of trade exchanges must keep records that record and explain all business transactions and other acts they engage in that are relevant to a particular sale, importation, purchase, dealing or entitlement. The records must be kept for five years after the completion of the relevant transactions or acts.

In addition to ordinary accounting documents, this may include:

• Invoices and receipts;
• Purchase orders, delivery dockets, contracts and barter scheme statements;
• Other relevant documents, such as the application for membership of the bartering scheme, the rules of the scheme, and any other documents governing the relationships between members, and between members and the trade exchange.

 See also:

• GSTR 2003/14 Goods and services tax: the GST implications of transactions between members of a barter scheme conducted by a trade exchange (As at 29 May 2013).

From ATO website as current today.

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