Quite often the outcome of the cash flow budget and the profitability budget are confused – while most people are able to recognise that they are different reports, there is difficulty in determining why.
The cash flow budget is a schedule of the anticipated inflows and outflows of cash – the main thing that sets it apart from the profitability budget is remembering that there are many inflows and outflows of cash that do not affect your profitability!
Some of the common inflows of cash which are not profit items include:
- owner contributions
- proceeds of loans
- proceeds on sale of plant and equipment or capital items*
Some of the common outflows of cash which are not profit items include:
- loan repayments**
- finance repayments**
- owner drawings
The other item that has a significant impact on cash flow, but does not relate to profit, is the GST (Goods and Services Tax).
Any business registered for GST will have inflows being the sale amount plus GST and outflows being the expense amount plus GST – the GST does not form part of the profit and loss statement, but the BAS (Business Activity Statement) payment or refund should be accounted for in your cash flow budget.
I hope this helps to clarify the difference…
* Part of these proceeds may constitute profit on sale, but it is unlikely the whole amount will be a profit item
** Part of these outflows may relate to interest which may affect profit, but it is unlikely the whole amount is a profit item