Talking Cents

The Difference Between Budget and Cash Flow

Businesses of all types need a regular budgeting process to control and assess their expenses. There are so many different kinds of costs that get overlooked until the invoices arrive. As a result, regular bookkeeping and budgeting help in understanding your expenses.

Businesses have many expenses to keep track of, they use different tools such as budgeting, cash flow analysis, financial reporting etc. These few tools that seem similar work very differently. This may make things confusing for a small business owner whose expertise lies in running the business rather than understanding financial terminologies. Therefore, to avoid further confusion, let's see what a budget and cash flow are. And, more importantly, how do they differ from each other?

Budget

A budget is a summary or an itemised list of expenses and income generated over a specific duration of time. This duration is sometimes annual and other times quarterly. A budget of a business helps in understanding the incoming and outgoing cash. It also helps in understanding the actual income generated, the turnover and how much expenses are spent over a certain period.

Cash Flow

A cash flow, on the other hand, accounts for the expenses and income in a much shorter interval, usually a month or two. The function of a cash flow is to ensure there is sufficient liquidity to pay the bills when they are due. Cash flow is a function of time.

Moreover, accountants usually align the cash flow to invest in other growth prospects. For a business to get a loan, the cash flow must be fluid; that is, there must be sufficient cash flow between payment cycles to ensure that the company does not run out of liquid amounts.

Difference between a Budget and a Cash Flow

A budget is more long-term than a cash flow. Also, the same budget can be organised in different cash flow patterns, all yielding different results for the monthly cash supply.

However, the significant difference between a budget and a cash flow is that their purpose is very different. A budget restricts the amount of total money utilised in a single year. In contrast, a cash flow ensures that the monthly expenses are timed wisely. For example, you do not want to pay a few vendors earlier than you have to and have no cash left for your commercial rent.

Consider MAS for your small business accounting needs

When running a small business, leave its financial and accounting aspects to professionals. Focus all your focus on your business while not worrying about budgeting, bookkeeping, cash flow forecasting, tax filing, etc. and hire our competent small business accountant in Sydney and Zetland now. Contact us here.