What can operating budgets sometimes misrepresent compared to cash flow budgets?

Operating budgets focus on anticipated revenues and expenses based on accrual accounting, which records income when earned and expenses when incurred, regardless of when cash is actually exchanged. In contrast, cash flow budgets explicitly track the actual inflows and outflows of cash over a specific period.

Because of this difference in perspective, operating budgets can misrepresent potential cash shortfalls. They may indicate that a company is profitable due to recorded revenues while failing to reflect that cash may not be available in the short term to meet its expenses and obligations. This means that, under operating budget projections, a business could appear to be financially healthy even if it might face liquidity issues due to timing differences between earnings and cash receipts. Thus, while operating budgets can provide useful insights into profitability, they do not necessarily communicate the real-time cash position, which is critical for understanding a company’s ability to sustain operations and avoid shortfalls.