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.