Learn how to build an accurate business cash flow budget to determine your correct income planning target. When you build a business cash flow budget, you always want to make sure that it accurately represents as closely as possible, the current cost of goods and expenses of your business, as well as
future anticipated expenses.
A cash flow budget should include:
1 – Cost of Goods expenses
2 – Operating expenses
3 – Funds for Future expansion
4 – Funds for Emergency expenses
5 – Long Term Wealth Building set-aside money
The place to start is to look at your profit and loss statement for the past consecutive 12 months. This catches the once a year or bi-annual expenses that tend to be forgotten like a property tax bill.
If major changes have taken place in some expense category more recently — perhaps in the past quarter your payroll increased because of hiring additional staff. In this case, the more current figures should be used for that category.
In addition to these items, make certain that you include expenses that your company needs to plan spending for in the future. These could be expenses to expand your current business or merge with another business. These might also be expenses your company might incur on an emergency basis like repairing or replacing old equipment.
The way things look in the current economy; there will be real opportunities to purchase assets and material at rock-bottom prices in the near future. You might want to set some cash aside to take advantage of this blessing for your company.
The best way to acquire this cash would be to include what you think you will need in your budget for this added purpose. You can also use this acquired cash as a buffer to handle emergencies if times get tougher.
The purpose of a cash flow budget is to find out how much income you have to make to do better than break even. If you are implementing operational planning in your company against a budget number that is too low, you are guaranteed to lose cash flow and profits.
If you have all the items (1 – 5 above) included in your budget up front, then you will set your demand for income goals high enough to acquire all of these items, both for your present and the future needs. The budget then gets translated into an income target and sent down your organization for implementation of programs and projects which result in actual production of the products and services your company produces.
Simultaneously, the marketing and sales divisions of your organization need to sell the products and services to attain the income target.
With a cash flow plan in place based on actual budget numbers rather than a “guess,” which may be under-estimated, your organization is much more likely to meet the demand for income targets you set.
Get this one right, and in the final analysis you will have met and exceeded your income goals due to the built-in profit items that were initially incorporated into the budget as expenses.
This is a bit of wisdom that successful business owners implement based on the old proven truth: it’s not how much money you make; it’s what you do with it that determines your financial condition.
So make your income targets by demanding the amount of money you really need by first building an accurate cash flow budget. It’s much easier to plan to get the money in advance and use it for the purposes that you have in mind for your organization, than it is to come up short and scramble around to meet unexpected expenses.
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