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Cash Budget or Cash Forecast - What is the Difference?
Confusion exists between a cash budget and cash forecast, although both closely relate to each other. The budget uses much of the same data as the forecast, but each has its own purpose in the world of financial planning and analysis. "Cash is King" or so the saying goes, and a business that cannot track and control its cash consistently, whether in a budget or forecast, may be headed for rough waters.
A cash budget presents the cash inflows and outflows expected to take place for a business or individual in a specified period. The budget will define the company's goals for what it wants to do, spend and accomplish within a set time. The important task of assembling a budget for cash helps individuals or companies keep up to date on the amount of liquidity they have, and a cash budget enables them to make spending choices that keep within the amount of cash available. A budget is generally assembled once or twice each year, including targets or sales goals the company plans to achieve.
The cash budget represents one component of an overall financial budget, which includes expenditures as well. Assembling a budget, whether for business or personal use, involves stating the revenue, and then the matching expenses in order to ensure the company can cover all expenses necessary. The budget becomes balanced when revenues equal expenditures. When budgeted expenditures exceed budgeted revenues, the budget runs a deficit and may cause a company or individual to borrow money to cover existing expenses. A budget runs at a surplus if, after covering all expenses, additional money remains for allocation to expansion or savings.
A Cash forecast tracks the flow of future dollars. It projects the amount of cash revenue a company will earn over a specified future time-period, and many business analysts look to cash flow as the best indicator of a company's financial health. Where the budget sets targets that may include possible events like the start-up of a new business division, the cash forecast strictly looks at past activity and extends it into the future, so would not necessarily include the possible new division, until the division actually starts operating and creating financial results.
A cash forecast tracks the company's bank balances, and may also include net short-term investments. Often prepared by the company's treasurer, businesses use it to secure bank financing, as it allows them to show a lender how and when the company will repay the financing. A cash flow forecast helps internal management as well, by keeping them informed of the future cash needs for the organization.
Companies benefit from assembling a cash budget and gain visibility into how much credit they can provide customers before having problems with cash flow. As another benefit, the discipline of preparing a cash budget helps management see where cash might be getting used unproductively. Projected large investments can also factor in as a different scenario, and assessed against the base-level forecast data for the business.
When constructing a cash flow forecast, companies gain from preparing the most pessimistic case scenario, as this allows for a cushion in the case of unexpected revenue or expense fluctuations. Performance inconsistencies become easier to identify and remedy, as well as predict with a cash forecast.