Budgets vs. cash flow forecasts: what’s the difference, and do you need both?

By Sharon

April 14, 2022
Budgets and cash flow forecasts

You might have nailed your branding and tone of voice, are working with your dream clients, and have some stellar employees in your court. Amazing.

You’ll only be able to continue on this route if you’ve got the numbers to back all of this up though, and your budgeting and cash flow forecasting will work wonders here!

Budgets and cash flow forecasts, they go hand in hand

No matter what stage of your business journey you’re at, budgeting is essential because it allows you to think about your goals, and then put them to paper. It also enables you to keep track of your financial health and avoid over spending on things you might not have the cash for, and helps you secure finance. It’s more of a long-term planning piece that covers a three, six or 12 month period.

On the other hand, a forecast is what you’ll input data into on a regular basis (I recommend doing this at least weekly), to see how you’re tracking against the budget. If you’ve overspent one month, for example, it means you can plan ahead and stay in good financial health, by spending a little less – like holding off on investing in new equipment or bringing on extra staff – in the next month.

Creating a budget: key steps to take 

When building your budget out, it helps to look back at historical data to determine how much you can feasibly put aside when it comes to investing in the business.

As the business grows, you’ll be able to increase your budget too, and invest in all of the things you need to support this growth, whether that’s new premises, more equipment, or more staff. It also helps you predict your earnings.

This approach can be a little tricky when you’re just starting out and don’t have the data, which is where an accountant or bookkeeper can come in super handy.

Key things your budget should include are:

    • A specific timeframe. I recommend creating an annual budget so you really hone in on those long-term goals, however you can also create three or six months budgets within this
    • All fixed costs you know you’ll be incurring over the timeframe, like salaries (including your own), annual subscriptions and rent.
    • Variable costs that you expect to pay, but change week to week or month to month, like utilities, wages for casual employees or contractors, and things like training and client or staff entertainment.
    • Your earnings as a calculation of what you plan to earn from your products or services over the period.

Tips for maximising your cash flow forecast

Your forecast should account for all of the things outlined in your budget, however it will also include your actual costs and earnings, so you can see how you’re tracking against the budget in real time.

Some pros of monitoring it on a weekly or more basis, which are all tied to increasing your cash flow, include:

Cost cutting. Your bookkeeping and accounting software allows you to organise costs by category, so if you’re overspending, you can easily identify which things you could reduce, especially those non-essentials like paid subscriptions or fancy equipment you don’t necessarily need, as your existing assets are working just fine for you.

Increase pricing. The forecast will allow you to see if you’re reaching your revenue goals. If this doesn’t reflect your budget and cash is tight each month, it might be time to reconsider your pricing strategy.

Planning for ‘what if’ scenarios. If you’re finding clients aren’t paying you on time, or you have both retainer and project-based customers, the forecast allows you to see when you might need to adjust costs over a particular period to account for these variables.

Improve debtor arrangements. As a follow on from this last point, if you’ve identified clients are consistently paying you late and this is impacting your cash flow, it highlights there’s a need to change your payment processes up to avoid late payments. Think direct debit arrangements for retainer clients, 50% up front payments for projects, and slight discounts or late fees to encourage on time payments.

Now I’ve really just touched the surface of these two very important parts of your business here!

If you’re interested in learning more about budgets and cash flow forecasts, and how to make them work for you, book a free consultation with me and we can get planning.

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