Last Updated on December 14, 2021
As a business owner, managing cash is a tedious but necessary part of the job. Keeping a hold of your cash flow is critical for a thriving, successful business, but it’s not always the simplest task or the easiest to understand.
Two terms often thrown around in the realm of business management are ‘cash budget’ and ‘statement of cash flows.’ They are not the same thing. So, what distinguishes one from the other?
Here’s an in-depth guide for small business owners on what a cash budget is, examples of a cash budget, and how it is different from a statement of cash flows so you can better manage your business and keep all things cash in order, especially for year-end accounting.
As a side-note for startups, you may find our equity dilution calculator useful to understand the implications of raising money from investors.
Cash Budget: The Basics
A cash budget helps a business owner manage the capital that is both coming in and going out each month. It’s not as formal as a true statement of cash flows, making it quicker and easier to prepare.
The cash budget should serve as a short-term budgeting tool to manage the networking capital of the business. Most business owners will create one at the beginning of every month, but some may elect to create them quarterly instead.
Another way to look at a cash budget is as a futuristic approach. You should complete a cash budget with the future in mind. How will you spend the money? How much will you spend? How will you make up that cash? How much do you anticipate making back?
People usually create a cash budget using figures from the past accounting year. If you know you spent X amount last year in August, then you can anticipate spending somewhere around the same amount this year and plan for it using a cash budget.
When you use a cash budget right, you can anticipate how much cash will be available to your business at the month’s end. You can use that data to prepare for either a positive or negative output (your cash flow margin). It can also help you anticipate a decrease in net working capital, an essential part of cash flow risk management.
If you see leftover working capital at the end of the month, you may use it to pay off other costs and improve your bottom line. If you are dealing with a negative capital-output, on the other hand, you may have time to take out a loan or use another tactic like factoring.
Modeling a Cash Budget
A simple cash budget can be typed up in a word processor and can be as simple as this:
Starting Cash – $5,000
Sales – $1,500
Accounts Receivable – $2,500
Total Cash: $9,000
Overhead – $2,000
Labor – $3,500
Materials – $2,000
Assets – $500
Total Cash Used: $8,000
Net Cash: +$1,000
Here, you can see that the total cash used leaves $1,000 left unspent at the end of the month if you’ve followed this budget. That leaves a positive output for you to use for whatever you may need.
If you’re facing large sums of receivables at any given time, you may be a fit for invoice factoring or accounts receivable financing, alternative lending solutions that helps your business access cash flow quickly and easily. Read our guides on how invoice factoring works and how accounts receivable financing works for more information.
Statement of Cash Flows: The Basics
A statement of cash flows, on the other hand, is much more comprehensive and detailed than a cash budget is. Typically, this document is created in addition to an income statement and a balance sheet.
The statement of cash flows document presents all items of credit or debit much more formally than a cash budget does. While it includes most of the same sources for cash and uses for cash as the cash budget, it may include more refined details about where the cash comes from and how it is spent.
While people create a cash budget with the future in mind, a statement of cash flows document is used to organize past data by analyzing the actual flows of money in and money out. A statement of cash flows also usually covers a longer period (typically a year).
To make a statement of cash flows, you’ll use the accounting data pulled from the previous accounting year as well as the most recent statement and will conduct a post-mortem financial analysis of what cash came in and what cash came out (and how).
Differences Between Cash Budget and Statement of Cash Flows
One of the major differences between a statement of cash flows and a cash budget is their requirement. Any publicly-traded company is required to create a statement of cash flows document that meets the Financial Accounting Standards Board’s standards every accounting year. Private companies will typically have these statements prepared on their behalf by an accountant, though it’s not required by law.
A cash budget, alternatively, is not legally required.
Another notable difference between the two is that the cash flow statement also includes depreciation, which is an important factor to account for. While this won’t change your net cash position, it’s critical to note this natural decline in business asset value as time goes on.
Many business owners use both of these tools to guide their financial forecasting and analytics. They may create cash budgets monthly or quarterly and then prepare one statement of cash flows document annually with their accountant. Both of these documents help the small business owner adequately manage any kind of company.
Your cash budgets and statement of cash flows together can provide you a general outlook for the projected cash your company will have available at a certain point in the year.
Where cash budgets can help you plan for the month ahead, a statement of cash flows can help you understand what’s already happened and how you can use that data for better financial planning in the future.
By using these two financial documents to look at both short- and long-term goals and positioning, you can determine whether you need to prepare for a negative cash flow or a positive cash flow. In the case of a negative cash flow, bank loans may be the next move. However, if you’re looking at positive cash flow, you can begin to plan how you’ll use this additional capital to support your business.
Jim is the General Manager of altLINE by The Southern Bank. altLINE partners with lenders nationwide to provide invoice factoring and accounts receivable financing to their small and medium-sized business customers. altLINE is a direct bank lender and a division of The Southern Bank Company, a community bank originally founded in 1936.