Creating a cash flow budget

A cash flow budget is one of the most important financial tools available to your business. And although we are now in March, it is not too late to create your first budget – the insights gained will more than compensate for the time it takes to create one.

 What is a cash flow budget?

At the most basic level, a cash flow budget records the cash you expect to receive from customers and pay out to suppliers.

• Note your opening cash balance
• Add your expected incoming cash earnings
• Deduct your planned cash outgoings

The result will be your budgeted cash flow balance, which must be measured over a pre-defined period of time. Depending on how many transactions you make, that period could be monthly, quarterly or annually, helping to assess how well you are performing against your business plan.

 8 ways in which a cash flow budget can help you

The cash flow budget is valuable because it:

1. Helps you to track your day-to-day financial commitments and better plan for how to meet them.
2. Helps you identify potential shortfalls and budget accordingly.
3. Helps you spot surpluses and allocate cash for re-investment in the business.
4. Helps you track progress towards business and earnings goals.
5. Helps you make informed decisions about purchases – particularly non-urgent ones.
6. Helps prove that you are properly managing finances for your bank or creditors, and that you can afford a loan or similar.
7. Helps you forecast the sales you need to make in order to cover your outgoings.
8. Helps you plan business finances 3 months or further into the future.

 Moving forward with your cash flow budget

Once you have begun recording your cash flow projections, it is important to revisit the figures regularly. You then need to compare actual income and expenditure against your budget to calculate variations and to assess how well your business is sticking to the financial plan. By regularly comparing the variance, you will be able to identify problems and take corrective action to keep finances moving smoothly.

Where there are significant, repeated variances between predicted and actual income, you will need to take some top- and bottom-line decisions including:

• How to reduce expenditure to bring it in line with income: consider speaking to a professional accountant for advice.
• Raising prices to increase cash flow.
• Renegotiating your terms of credit with customers to reduce incidences of delinquency.
• Tightening debt collection policies – even securing the services of a third party agency if necessary.
• Renegotiating credit terms with your own suppliers to provide extra time in which to pay your bills.
• Improving your own business processes to reduce costly inefficiency and wastage.

Modern SME accounting software, like Xero provide cash flow budgeting functions as standard, saving you the hassle of having to build a suitable spreadsheet or similar – all you need do is plug in the values and check the results regularly.

For more help and advice on cash flow budgets, or how to set one up using Xero, get in touch with one of the 3 Wise Bears team today.