Forecasting and planning for the future are crucial for the success of a business. For accurately planning and securing your business, you need to strike the right balance between your budgets and forecasts. Analyzing the difference between budgets and flow forecasts is the foundation of financial management. After going through this article, you will have a better understanding of the difference between budgeting and forecasting.
What is P&L budget?
The profit and loss of a business depend on factors such as income and expenditure of your financial plan. The P&L budget helps to analyze and estimate the profit and loss values of your business. With this type of account, your income and expenditure are accounted for while you incur them as it is on a profit and loss basis. It is recommended to have a P & L budget internally even though a lender or investor might ask you for one.
How do you make a P&L budget?
The basic step towards creating a P&L budget is to have a proper understanding of the income that you want and the expenses you have. For it will be helpful if you can have a complete analysis of your entire business activities. Though it is said countless times, it is advisable to have an even breakpoint. If you have numerous services and products depending on your company, all those can have an even break analysis. Rely on your chart of account categories while preparing your activities for calculating your budget. You can also employ the assistants of accounting software to do your task more effectively and easily. It is also important to realize that your P&L budget does not include taxes, loans, or any other dividends.
Importance of P&L budget
· We can get a complete detailed report of a financial year from a budgets
· The variation from the expected performance is determined by the actual result that received from a well-organized and a stable budget
· In case of some downfall, the organizations can easily evaluate the budget and find some remedial steps overcome such economical or financial crises
· The budget documents of a financial year helps to compare the actual performance and the expected performance and helps to introduce new changes that bring back the financial stability in case of a loss.
What is Flow Forecast?
The flow forecast is a set of plans for an organization that details the flow of cash. By using this method, we can easily calculate the monthly earnings and expenditure of our company and help to act according to it. The flow forecast helps to predict the income deficit, so we can rearrange our activities to maintain the financial stability of our organization. It gives the exact details regarding the receipts and projected payments form the corresponding bank accounts of the organization. In a standard organization, they normally create flow forecasts on a monthly or quarterly basis. We can easily manage the complex tax payment system of the government by using this flow forecast system because it holds separate entries for tax payments.
How do you make a flow forecast?
Having a fixed opening balance is crucial for determining stable cash flow. Avoid unusual patterns in your bank statements as it will cause discrepancies. Try to work out a perfect balance between your bank balance and the statement. Depending on the amount, your customer pays and your expenses to the partners or suppliers you can estimate your monthly forecast for cash in and out. There are numerous ways to obtain this. One method is to do it manually using a spreadsheet following a particular cash flow template. The other method is to rely on cloud-based software to streamline your finances. Using a specialized tool always has an upper hand then manual cash flow forecast. These tools have specialized features such as live updates, accurate data capture, and ease of use.
Importance of Flow Forecast
· The balanced flow of payment of liability is reflected inflow forecast
· The financial stability of our organization can be monitored at a regular interval of time perhaps quarterly or monthly.
· The graphs representing the actual flow of expense line and major revenue items is mainly included in the forecast
· The flow forecast revels the current financial position of an organization, an uplift or downfall can be identified easily at the beginning stage itself and can make necessary solutions for the problems
The difference between a budget and a forecast
The major difference between a budget and a forecast is that a budget includes the plan for your business including the goals to achieve while the forecast calculates the real expectations for your results in a summarized format. The key difference between a budget and a forecast is that the budget is a plan for where a business wants to go, while a forecast is an indication of where it is going. In short, the budget is the road map for the business while the forecast is the indicator of where it is heading. The information from the forecast can be readily used as a short-term representation of the business conditions. The budget can include targets that are not easily achievable and might require long-term efforts. The budget requires constant updates as the data might become obsolete within months. These parameters are extremely important in a rapidly changing business environment. The budget is calculated once in a year and it is not the actual financial state of the organization in other hand forecast is calculated quarterly or monthly, so it provides the actual financial status of the organization
Which one is best for you?
The purpose of both is different as a P&L budget helps you understand whether your business is profitable or not while the flow forecast will help you determine the amount of cash left with you by the end of the month. Having a view of both will help you to analyze your business more efficiently.
They provide you with data such as profit or loss valuation and cash flow status of your company.