The Difference Between a P&L Budget and a Forecast
Planning for the future is essential for business success. In order to make confident decisions, you need to know what lies ahead. Understanding the difference between your budget and forecasts can help you to properly plan for the future of your business.
What is a P&L budget?
Your profit and loss is your business’s financial plan, comprised of your income and expenditures – including interest. In short, the P&L budget shows you how much profit or loss your business is planning to make, most often on a monthly basis. With this kind of accounting, it’s important to note that budgeting on a profit and loss basis means that your income and expenditure is accounted for when you incur them, rather than when the money is actually in the bank.
You might be asked for a P&L budget by a lender or investor, but keeping an internal one is always good practice. Profit and loss budgeting can work even if your figures are based solely on a best estimate of your expenditure and income. In this way, it’s a good indicator of where you are and what you’re working towards.
How do you make a P&L budget?
To make a P&L budget you’ll need to have a good understanding of the income you’re earning and the expenses you’re incurring. For this reason, it’s a good time to take a step back to analyse all the activities across your business.
Having a business plan in place is only the first step. You’ll need to actively make strides to achieve your goals, and decide what resources you’ll need to achieve them.
Knowing your break-even point is a good place to start. Making sure your outgoings don’t outweigh your incomings seems obvious but can be harder to stick to than you’d think. Depending on the size of your company, you might do a break-even analysis for multiple products or services.
When mapping out your activities for your budget, use your chart of account categories so that you can compare/report on your budget vs actuals more easily. Using accounting software like Xero or QuickBooks can make this a lot easier. It’s also important to remember that your P&L budget does not include taxes, repayments of loans, or dividends.
What is a cash flow forecast?
A cash flow forecast is a plan of when cash will come into and out of your business. A forecast can’t show whether or not your business is profitable, but it will clearly show you what you’ll have in your bank at the end of the month.
Cash flow forecasts are best used proactively rather than reactively. It’s sensible to use a cash flow forecast to anticipate upcoming cash shortages and how to manage them. Once you can see future peaks and troughs, you can play around with the numbers to work out how to maintain a positive bank balance, or reinvest any surplus cash in the business.
Unlike the P&L budget, your cash flow forecast will show items such as tax, and repayment of loans and dividends. However, it won’t include things like depreciation expenses. If it impacts your bank balance, it’ll be on the cash flow.
How do you make a cash flow forecast?
Knowing that your opening balance is fixed is essential to having a stable starting point for your cash flow. This is why reconciliation is so important. If you have unreconciled/ unmatched items in your accounting software then you’ll see discrepancies between your bank balance and your statement balance. Making sure these match is essential to the understanding of your finances.
With your opening balance, you can then put in monthly forecasts for cash in and out based on when and how much customers pay, and when you expect to pay overheads and suppliers.
Your P&L budget only accounts for income and expenditure when you incur them and in doing so remains relatively fixed. Creating a cash flow forecast on a tool such as Float can keep it live and your financial information available on a rolling basis. For instance, if you have late paying customers you need to know how your bank balance will be affected and a forecast can show you this. If you use Float, you can set when you expect different bills or invoices to be paid.
A big issue with manual cash flow forecasts is that they’re not up-to-date. In Float, your forecast stays live and updates automatically with your accounting software to keep you in the know.
Which is best?
A P&L budget will show you whether or not you’re profitable but a cash flow forecast will show you how much cash is available to you. Having both means of forecasting allows you to see a more complete view of your business’s finances. Whilst a profit and loss may show that you’re profitable, a cash flow forecast might show that you’re in the red.