Cash Flow Budget – The Key to your Business Success and growth
A lot of financial planning goes behind the success of a business unit. Cash flow budget planning is the centrifugal point of your business plan. You decide on your project and future plans based on your cash flow and the amount of expense that you can incur in a given period of time. Let us first understand what a cash flow budget is and then discuss about it in detail. Cash flow budget is the act of recording the expected inflow and outflow of cash over a period of time. Why’s it important to do cash flow budgeting? Cash flow budget planning helps you to achieve the following
- Understand and plan the period of peaks and drops in your cash flow for a period of time
- Set important benchmarks and indicators of what is expected to be achieved
- Helps in making informed decisions while planning expenditures are additional to what has already been planned for the period
- Gives a clear picture to your bank about your cash flow management and affordability of additional borrowing from the banks
Now that we have understood what Cash flow budget is, let us focus on the most important factor of cash flow budgeting, that is factored that need to be considered while planning the budget of your cash flows. Cash flow budget is prepared for a period of twelve months. You can also consider preparing a ninety days budget for your cash flow while you start doing the budgeting for your business unit. The factors that are important for doing your cash flow budget are as follows
- Having key data – You need to make sure that you have key data inputs while preparing for your cash flow budgeting. The key input data are as follows.
v Expected Sales Forecasting for the financial year
v Expected cash receipt for a financial period, like grants, loans from the bank or a financial institution, tax refund, etc.
v Expected cash payments for the financial year, for example payment of tax and loan repayments if any.
- Having a format for cash flow budgeting – The first thing that you need to do is set up a worksheet that includes all the transactions related to your receipts and payments. Even if it is not a big ticket expenses make sure to add it because all of it is a part of your business expenses. Make sure to add an appropriate column for the number of months that you are budgeting for. The procedure for working out the cash flow budget of your business is by taking into consideration the following
v Beginning cash balance
v Adding budgeted cash inflows
v Deducting the budgeted cash outflows
Once you have taken into consideration the key input data and followed the procedure outlined then you will get the result for your cash flow budget. If your analysis derived from the cash flow budget report states that your outflow is more than your inflow then you will need to do a bit of cash management. With basic business instinct, you can find out whether your inflow is lesser than your out flow but your cash flow budget will help you derive at the correct figure which will help you do further planning on getting the situation reverted to inflow increasing and your out flow decreasing considerably.
There are a few basic steps that you can take to ensure that your cash flow budget show increase in your in flow.
- Increase the flow of cash from your customers – Make sure that your customers are making payments in a timely manner. In order to get your payment from your customers you need to make sure that your invoices reach them correctly and have all the information is provided in the invoice. If there are ambiguities in the invoice then it may result in delay of payment. Check the credibility of your customers. If you feel that you have customers who are not able to pay you back in time then try to reduce trading terms with them. Remember your business depends upon the timely inflow of your cash. Contact your customer and see if the payment, either in full or in half, can be done before the sales. This will help in having a regular inflow of cash.
- Plan your cash outflows – Keep a check on the causes and reasons for the outflows of your cash. Check whether your expenses are all the need of the hour. There might be some expenses which are important but can be dealt with later and there will be some expenses which are both important and urgent. Rather than focusing on all the expenses first focus on the expenses which are both important and urgent. Apart from that there will be expenses which will be related to nice to haves. That means it would be nice to have some products in office but your work and production will not be hampered if it is not there. Try to avoid those expenses as much as possible. Once you have planned and reduced your expenses or cash out flow then you will automatically see that the inflow of your cash looks higher than your cash outflow. Although you might not have a significant increase in your cash inflow. If you can make the payments at the right time then you can use credit cards for making payments for some purchases through credit cards. It gives a grace period of a certain amount of days and you can make the payment as and when you have the cash with you. But make sure to make the payment on time or else your interest will get added and non payment might affect your credit history too.