7 minutes read

Difference Between Cash Flow Statement And Cash Budget

Team CrossVal

9 Jun 2024 •7 minutes read

Difference Between Cash Flow Statement And Cash Budget

Table of Contents

What is a Cash Flow Statement
What are the Key Components of a Cash Flow Statement
What is the Cash Budget
What are the Key Components of a Cash Budget
Cash Flow Statement Vs. Cash Budget

Launching your dream business is thrilling, especially as sales start to grow. However, a persistent worry nags at you: is your company truly profitable?

You have two financial reports in front of you—a cash flow statement and a cash budget. And both seem to track income and expenses, yet something feels off.

Are they conveying the same information?

Not really! While the cash flow percentage can be calculated by dividing the free cash flow by net operating cash flow, the cash flow budget is simply the inflow/outflow of cash during a given period.

This blog will dive into the specifics!

What is a Cash Flow Statement

A cash flow statement is crucial for managing a company’s finances by tracking its cash flow.

As one of the three key financial reports, alongside the income statement and balance sheet, it helps evaluate a company’s performance. This statement is especially useful for short-term planning through cash forecasting.

The cash flow statement details the sources and uses of cash, allowing you to monitor money coming in and going out. Cash inflows come from operating, investing, and financing activities, while outflows cover business expenses and investments.

The insights gained from this statement enable management to make informed decisions about business operations.

Businesses generally strive for a positive cash flow to avoid borrowing money to sustain operations. A healthy cash flow ensures the company can maintain its activities without relying on external funding.

What are the Key Components of a Cash Flow Statement

A cash flow statement has three main components:

Cash flows from operating activities (CFO)
Cash flows from investing activities (CFI)
Cash flows from financing activities (CFF)

Cash Flow from Operations

This section reflects cash generated from the income statement, initially reported on an accrual basis.

It includes items such as accounts receivable, accounts payable, and income taxes payable. For instance, when a client pays a receivable, it is recorded as cash from operations.

Any changes in current assets or liabilities, which are due within a year, are also captured here.

Recommended Read: Operating Statement: Meaning, Pros, Cons & More

Cash Flow from Investing

This part records cash movements related to capital expenditures and sales of long-term investments, such as fixed assets including vehicles, furniture, buildings, or land.

It also covers business acquisitions and the purchase of investment securities. Inflows come from selling assets, businesses, and securities.

Investors pay attention to this section to see how a company maintains and grows its physical assets.

Recommended Read: How to Find Investors For Your Business

Cash Flow from Financing

This section details cash flows from debt and equity transactions. It includes activities like paying dividends, repurchasing or issuing stocks and bonds, and handling long-term debt.

Investors interested in dividend-paying companies find this section crucial, as it shows the cash available for dividend payments, which comes from cash reserves rather than net income.

What is the Cash Budget

A major difference between a cash flow statement and a cash budget is that a cash budget is a specialised financial plan that forecasts a company’s cash inflows and outflows over a specific period.

This includes payments from debtors, bills, interest from loans, stock dividends, and proceeds from selling fixed assets.

On the other side, cash utilisation encompasses expenses like salaries, rent, mail, telephone, entertainment, creditor payments, and asset purchases.

By detailing anticipated cash movements, a cash budget helps businesses predict their future cash availability.

It summarizes these projected cash flows, enabling companies to make informed projections about their financial status. Financial strategies often include preparing a cash budget to manage periods of both low and high cash flow.

A low rate of return indicates that the company has not optimized its cash flow, potentially leading to insufficient funds to pay bills on time.

Generally, businesses should maintain enough cash to cover expected needs while keeping a cushion for unforeseen expenses.

Recommended Read: How to Categorize Expenses

What are the Key Components of a Cash Budget

The key components of a cash budget are cash inflows and outflows, which determine the opening and ending cash balances for a specific period.

Cash Inflows

Sales Revenue:

Estimated gross income from selling goods/services. Accurate forecasts are vital, based on past data and market trends. For instance, if you expect a 25% sales increase from a new campaign, you can factor that into cash flow projections.

Other Income Sources:

Additional revenues like rental income, licensing fees, royalties, and supplementary income. Including these provides a full view of cash inflows.

Also Read: Revenue Vs Profit Vs Income

Investment Returns:

Income from investments in stocks, bonds, etc. For instance, dividends from stocks must be included in cash flow projections.

Recommended Read: A Step-By-Step Guide To Calculate Operating Income

Cash Outflows

Operating Expenses:

Daily costs like raw materials, salaries, operations and utilities. For instance, implementing energy-efficient practices in the workplace can lower utility bills, thus positively affecting cash flow.

Capital Expenditures:

Investments in long-term assets like equipment and property. Planning is needed to balance these with available cash.

Debt Repayments:

Paying back loans is crucial for maintaining good credit standing. Aligning repayment schedules with cash flow cycles can help meet obligations without affecting liquidity.

Taxes and Other Obligations:

Businesses must pay various taxes and fulfil contractual obligations. Effective tax planning and timely payments are essential to control cash outflows.

Net Cash Flow = Cash Inflows – Cash Outflows

A positive net cash flow means that incoming cash is greater than outgoing cash, indicating strong financial health.

Cash Flow Statement Vs. Cash Budget

Although both cash budget and cash flow statement revolve around cash flow management, they serve different purposes and provide distinct perspectives on a company’s financial landscape.

The major differences between the cash flow statement and cash budget include:

Aspect	Cash Budget	Cash Flow Statement
Purpose and Scope	A financial plan outlining expected cash inflows and outflows enables businesses to forecast cash position, identify shortfalls, and plan funding or investments.	Detailed records of cash inflows and outflows, analyzing operating, investing, and financing activities, revealing how cash moves within a company’s operations, investments, and financing.
Time Horizon	Short-term cash plans project cash flow over a specific period, manage operations, and working capital, and ensure liquidity.	Summaries of cash inflows and outflows over a year, evaluating cash position, financial performance, obligations, and growth opportunities.
Level of Detail	Detailed plans outlining specific cash inflows and outflows for activities like sales, purchases, salaries, rent, and debt payments, enabling businesses to anticipate cash flows and identify shortages or surpluses.	Aggregated breakdowns of cash inflows and outflows, focusing on operating, investing, and financing activities to provide an overview of a company’s cash position.
Predictive vs. Historical	Forward-looking estimates of future cash flows based on sales, expenses, investments, and financing, aiding in proactive cash management by anticipating gaps or excesses.	Retrospective reports on actual cash inflows and outflows within a period, evaluating historical cash performance and ability to generate and manage cash effectively.
Users and Purpose	Internal tool for financial managers and executives, aiding short-term planning, budgeting, working capital management, and cash flow optimisation. Aligns resources with strategic objectives for financial stability.	Informative for internal and external stakeholders, including investors, creditors, and analysts. Provides insights into liquidity, solvency, financial health, and ability to generate cash, meet obligations, and fund growth.

Conclusion

Grasping the difference between a cash flow statement and a cash budget is vital for shaping a robust financial model, is essential for maintaining a healthy cash flow.

Our user-friendly platform, CrossVal, can simplify this whole process, and ultimately help you by creating a successful financial model in just 4 minutes and 10 seconds. Create your free account now and try it free for 14 days.

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