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Cash Flow Budget

A cash flow budget is a projection of your business’ cash inflows and outflows over a certain period of time. A typical cash flow budget predicts the anticipated cash receipts and disbursements of a business on a month-to-month basis.

At least a six-month cash flow budget has to be prepared in advance. The primary purpose of using a cash flow budget is to predict your business’ ability to take in more cash than it pays out. The cash flow budget can also predict your business’ cash flow gaps — periods when cash outflows exceed cash inflows when combined with your cash reserves. You can take cash flow management steps to ensure that the gaps are closed, or at least narrowed, when they are predicted early.

Preparing a cash flow budget involves four steps:

  • Preparing a sales forecast
    • This would require you to carry out a lot of homework. You need to find out from your current and potential customers the sales forecast.
  • Projecting your anticipated cash inflows
    • You must bear in mind that not all sales are done in cash. You might be doing well in terms of sales but you are giving credit, hence low flow of cased. This is one of the reasons a company runs into difficulties and may end up winding up.
  • Projecting your anticipated cash outflows
    • This is the cash you need to stay in business. This would include planned expenses like rental, supplier payment, wages and the big one is the unplanned expenses in the event of something breaking down and you have not thought about it.
  • Consolidating the projections together to come up with your cash flow bottom line
    • By putting all the above three together you would arrive at your budget.

You can improve your cash flow in the following ways:-

  • Improve the flow of money into your business
    • You must try and collect money owed to you quickly, which means you should be giving a lower credit term than what your vendors give you. For example, if you are giving 30 days credit to your customers you should be getting credit terms from your suppliers at  45 days at least to be able to give you a buffer of 15 days to play around.
  • Delay the flow of money out of your business
    • This is not a good practice but sometimes you need to delay to stay in business. What you might need to do is always ensure your terms are longer then the ones you give.
  • Reduce the amounts you pay for operational costs of your business
    • This is an area you need to optimise. You may have a space bigger than you need or more expensive, so you should look for alternatives. You may have more staff than required, so you need to run a leaner operation by training staff to multi task and upgrading their skills.

How to fill cash flow gaps? Cash outflows and inflows rarely, if ever, occur at the same time. More often than not, cash inflows lag behind your cash outflows, leaving your business short of money on occasions. Some cash flow gaps are created intentionally.

Cash flow gaps are often filled by external financing sources. When you use external sources there is a cost you need to pay in terms of interest which means it will further eat into your profits. Hence, you need to always be prepared to look for lower interest sources.

What to Do with a Cash Surplus? Managing and improving your cash flow should result in a cash surplus for your business. A cash surplus is the cash that exceeds the cash required for day-to-day operations. How you handle your cash surplus is just as important as the management of money into and out of your company. Two of the most common uses of extra cash are paying debts and making investment. Sadly many of us use it to do unnecessary things like buying a new car which we do not need. The problem here is many of us do not realise the company is different from individuals and hence we end up spending company money which is not ours. You must ensure you do not fall into this trap as this can lead to your business closing down. It is worth noting that profit in business does not equal to cash flow, they are both different. That is why companies which are cash rich tend to be able to last during lower sales because they are able to meet expenses. If companies are unable to meet their expenses they would go out of business and in paper the company could be a profitable company. Thus, you must ensure you have enough cash to keep your business floating.

2 comments to Cash Flow Budget

  • apurva

    Very informative and can be easily understood by someone with little or no background in finance. It also allows you to provide for atleast one pitfall in a new business i.e. working capital issues, which is generally overlooked.

  • Rangarajan.R

    A well prepared capsule for any common person to understand. There are several companies have come out of crisis with better cash flow management. A good subject at right to all associated.

Leave a Reply to Rangarajan.R Cancel reply

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