How to Put Together a Simple Cash Flow Budget

As a small-business owner, it’s up to you to make sure your company has the financial wherewithal to stay afloat, the resources to achieve your business goals and the reserves to fund growth – next week, next month and next year. This requires planning, analysis and a good cash flow budget.

A cash flow budget, also known as a cash flow forecast, is essential to a business’ near-term financial processes and long-term survival. A cash flow budget can help you:

•    Time expenditures based on projected revenues

•    Ensure that you have the cash to pay all your obligations

•    Be proactive about growth and expansion

•    Maintain control of your financial situation

A cash flow budget doesn’t have to be complicated. You can use a simple spreadsheet, purchase budgeting software or even create a forecast by hand. Following are the steps to developing a basic cash flow budget:

•    Determine your projected revenue based on monthly sales or billings.

•    Estimate when you can reasonably expect to collect accounts receivable (AR).

•    Identify any additional expected cash inflows, such as loans, refunds, deposits, etc.

•    Compile all your expenses and other payables.

•    Estimate payment dates for your payables.

•    Add the amounts to your cash disbursements forecast.

You should not include noncash items in your cash flow budget. Although noncash items such as depreciation and amortization are relevant to your financial condition, they do not involve cash outlays and so are not part of the cash flow budget.

Use prior years’ experience and realistic AR estimates as a basis for timing your payables. Items such as payroll, rent and utilities are relatively fixed and recur regularly. Expenses such as advertising, travel and entertainment are somewhat variable but are usually paid in the current budget month. Be sure to figure in fixed asset purchases and loan repayments that you will make during the year.

Once you have created a preliminary cash flow budget, compare your actual results with your budget forecast and note any significant variances. Compare your outstanding AR and accounts payable (AP), focusing on those AR that you expect to collect and AP that you expect to pay in the month ahead. Does the difference between the two equal the amount in your cash flow budget? Are you comfortable with the amount, given your current and future cash position?

Think of the cash flow budget as a living document, and update your budget forecast to reflect new information, such as macroeconomic factors, microeconomic trends or new business activities that will likely impact your business and cash flow.

Use the cash flow forecast as a basis for timing capital expenditures and making expansion and hiring decisions. Also be sure to review the AR list weekly against your projections. Throughout the month, try to make payments within your budget so that you stay close to your planned net cash flow position.

Three Reasons You Need a Good Bookkeeper

For a solopreneur, entrepreneur or small-business owner, having a good bookkeeper is just as important as having a good accountant. One is no substitute for the other.

Generally, a bookkeeper is responsible for recording financial transactions, including sales, purchases, receipts and payments, into a general ledger. Other bookkeeping tasks may include monitoring cash flow, paying bills and collecting money that is due to the company.

Why would you need a bookkeeper? Following are three good reasons:

Time Is Money: Running a business involves a good deal of paperwork, and doing paperwork is probably not the best use of your time. The time you spend doing your own books could almost certainly be better spent.

Accurate Financial Statements: Lenders, investors and creditors expect you to maintain accurate books and produce proper financial statements. These records can also help your business stand up to a tax audit. Of course, you must produce proper financial statements if you ever want to sell your business as well.

Tax and Financial Strategies: A bookkeeper can guard against over- or underpayment of taxes, advise you on the profitability of your efforts, and help you be proactive about your finances.

In the U.S., there is no certification or license requirement for bookkeepers, but the National Association of Certified Public Bookkeepers offers a Certified Bookkeeper credential or Certified Public Bookkeeper license.

How Small Businesses Can Improve Their Cash Flow

It’s a common lament among small-business owners and solopreneurs: “If I’m making so much money, why am I always broke?”

The problem often boils down to the difference between net income and cash flow.

Net income is the bottom line, or the profit or loss that is recorded on your income statement after accounting for all business costs and expenses.

Cash flow is money that has been collected and is available for you to use.

The income statement is updated whenever you make a sale or complete a job.

However, you may not see payment for these activities for 30, 60 or even 90 days. Even though you have generated revenue, it is not yet available as cash for you to spend.

A drastic imbalance between net income and cash flow can lead to a situation where you are generating healthy profits from your business activities, but you don’t have enough cash to cover expenses such as overhead, labor and materials.

The money has been earned and recorded, but it hasn’t been collected and thus is not available to support your operations.

There are a number of ways that cash can get trapped on the balance sheet.

The two most common are for customers to delay payment on receivables and for inventory levels to get out of hand. Here are some ways you can avoid falling victim to your sales success by running out of cash:

  • Monitor cash flow regularly. Get into the habit of staying on top of the amount of money you have available at all times.
  • If your cash flow level falls below a certain threshold, or if you see an adverse trend developing, look into financing options before things reach a crisis point.
  • Use payment policies that enhance cash flow services. Ask customers to make deposits on their orders. Offer discounts to those who pay up front, or use a tiered payment schedule that encourages early payment or pre-payment for goods.
  • Take advantage of your creditors’ payment terms so that you retain use of your cash for as long as possible.
  • Ask suppliers for flexible payment terms as these can be more beneficial to cash flow than discounts or low prices.
  • Avoid keeping excess inventory on hand. Use a just-in-time inventory management system, buying what you need only when you need it.
  • Issue invoices promptly and follow up on payments that are past due.

There are many examples of good, solid companies that failed because they could not generate enough cash.

Cash flow is a better metric of a company’s financial health than net income.

Indeed, operating cash flow is the lifeblood of a company and the most important barometer that lenders and investors use to measure a firm’s financial health.

Your cash flow statement provides immediate insight into your financial position at any point in time and reflects your ability to remain solvent in the near term.

What You Need to Know About Depreciation

Depreciation is an income tax deduction that lets you recover the cost of certain property. To qualify as a depreciation deduction, property must meet the following criteria:

  • You must own the property.
  • You must use the property in business or in an income-producing activity.
  • The property must have a useful life of more than one year.

Most types of tangible property and equipment are depreciable except for land. In addition, some intangible property, such as patents and copyrights, can be depreciated. You may also depreciate the cost of capital improvements on leased property.

Depreciation begins when you place the property in service for your business and ends when you have fully recovered the property’s cost or when it is retired from service, whichever happens first. If you use the property for both business and personal purposes, you can deduct depreciation based only on your business use of the property.

IRS Form 4562, Depreciation and Amortization, is the form used to report depreciation on your tax return.

Straight-line depreciation is the most common method of depreciating assets. However, in order to reduce tax liability as soon as possible, some accountants use other approved methods to accelerate depreciation and record larger amounts of depreciation in the early years of an asset’s life. Check the regulations published by the Internal Revenue Service and your state taxing authority for specific rules regarding depreciation and methods of calculating depreciation for various types of assets.