What is the difference between a cashflow budget and forecasts?

Cashflow forecasts tend to be more realistic, whilst budgets are speculative – find out how they can inform the growth strategy of your small business

Forecasting is essential for early stage and high-growth companies. Typically, the profile of these businesses will mean that they are not yet profit-generating, and in some instances may be pursuing a strategy of growing their top line revenues in place of being focused on their profitability.

But what is the difference between cashflow forecasting and budgeting?

Despite their name inferring that they only contain expenses, budgets commonly include sales activity as well as expenditure transactions.

Budgets are typically prepared prior to a company’s financial year and tend to present a list of goals the business wants to achieve over the subsequent 12 months.

Forecasts differ in that they will take into consideration actual business activity in the year to date. For example, if a company has a fiscal year end starting in January and ending in December, they may create a forecast measuring the period from April-December, which is partly prepared with reference to the actual activity from the first quarter.

Based on their consideration of actual activity, forecasts tend to be more achievable and grounded, in reality, than budgets which in retrospect can come across as being optimistic.

Creating and maintaining a cashflow forecast will allow businesses to better plan for short-term funding gaps, alongside being able to prepare for equity raises before they run out of cash.

How often should cashflow forecasts be created?

New iterations of forecasts are referred to as reforecasts. It is common for businesses to reforecast on a quarterly basis, flexing figures based on the variance between actual and forecast activity from the previous three months.

However, if the cash position of a company is particularly tight they may reforecast on a monthly, weekly or even daily basis.

Read more: How to create a cashflow forecast

How should cashflow forecasts be used?

Forecasts are most commonly used by the senior management team and departmental owners. Making departmental owners responsible for subsections of forecasts related to them makes them more accountable.

Additionally, departmental owners should be consulted when forecasts are put together as they are likely to have insights into the financial and operational elements of their respective areas of the business.

It is good practice to incorporate forecasts into monthly management packs. This will allow comparison of monthly actuals to forecasts. You may want to compare the monthly actual activity to forecasts to show variances, alongside producing a 12-month view taking into account actuals to date alongside forecast data through to the end of the year.

Cloud accounting for cashflow forecasts

Whilst forecasts are normally created in Excel, there are huge benefits to transferring them to the cloud.

Cloud accounting software such as Xero allows business owners to upload budgets from Excel, whilst cashflow forecasting tools like FUTRLI either have the facility to build forecasts within their software or to upload Excel templates.

The benefits of using cloud software to manage forecasts is that there is less chance of making a manual error, alongside time-saving benefits of not having to edit data by blending actuals and forecasts manually.

Additionally, cashflow forecasting tools like FUTRLI connect directly to most cloud accounting software packages making this process even easier.

Propel by Deloitte delivers bespoke data analytics to help you track how your business is performing. It offers a wide range of services for businesses, including cashflow forecasting, creating budgets and setting KPIs. Contact us to discuss how it can support you.