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Cashflow tip – Cashflow and Budget – What are they and how are they different?

images/CashFlow.jpgFor many business owners they sound too hard or scary, but cash flow and a budgeting can show related information - so what are they and how are they different?

There is a difference and each have different uses, but mainly they help the business owner in the financial management of the business or organisation.

Cash Flow forecast this looks forward and is an estimate of the amount of money (actual cash) you expect to flow in and out of your business and includes all your 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.

  • It predicts when the actual income and expenditure occurs in the actual bank account(s).
  • Does not consider accruals and adjustments such as depreciation, only ACTUAL cash in and out
  • 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
  • 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
  • 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 details 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 how you go against the budget – are you on track for what you want to achieve? It does show how much money you have at the end, like the Cash Flow does.

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

  • Accruals and other non-cash adjustments such as depreciation are included
  • Large capital purchases will be included
  • 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.
  • Usually the full year budget is prepared in months like the Profit & Loss
  • A budget is NOT used to monitor the amount of cash in the bank accounts. That is where the cash flow forecast comes in.
  • 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.

Question? Email This email address is being protected from spambots. You need JavaScript enabled to view it. or call 0407 361 596 Australia

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Business Financials – What is the Balance Sheet – An example and definition

images/Business Financials2.jpgOne of the most important parts of working with our clients at Account Keeping Plus, is to educate and help businesses owners and bookkeepers understand what is the Balance Sheet (also known as the Financial Position) and here we give an example and definition.

Definition –

The Balance Sheet gives us a look at a point in time (eg end of month or year) of the assets and liabilities of the business. In other words, it is a picture or summary of what the business has and how it is funded.

There are three areas in the Balance Sheet – Assets Liabilities and Equity -

Assets include bank accounts, petty cash, inventory, debtors or accounts payable, which are also grouped as Current Assets because they turn over in less than 12 months. Long Term Assets show Plant & Equipment and Motor Vehicles.

Liabilities include credit cards and short term loans, creditors or accounts payable, GST, payroll withholding tax, PAYG and super accounts, which are grouped as Current Liabilities as they also turn over in less than 12 months. Long Term Liabilities show business loans and overdrafts, car loans/finance.

Equity is the difference of assets less liabilities. Sometimes known as net worth  or Shareholder Equity.

Example -

The Balance Sheet is similar to a house with a loan.

The house has a value (Asset), say $450,000 and if there is a loan (Liability) say of $250,000 there would be a net of $200,000 which is also called Equity or net worth.

images/Bal Sht like house.jpg

In a similar way, a business reports these as the Balance Sheet -  Assets, less its Liabilities, leaves Equity (Shareholder’s Equity)

images/Bal Sht summary.jpg

Look for future Posts where we will look at important ratios that can be calculated from parts of the Balance Sheet.

What are your thoughts? Call for FREE30min advice / strategy session today! 0407 361 596 Aust

Email This email address is being protected from spambots. You need JavaScript enabled to view it. or call 0407 361 596 Australia

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Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
Accounting Software Australia, MYOB, Quickbooks, accounts software, bookkeeping software
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