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Cash flow budgeting

Even the fastest growing companies can get into trouble with poor cash flow. If sales are growing faster than cash is being collected, inevitably cash will be getting used up or debt will be rising.

Another common scenario is to over spend on plant and equipment. The latest machine might be more efficient, but not if the repayments are going to use all of your cash.
A cash flow budget won’t solve these problems, but it will give a business owner more information and give you advance warning of what is on the horizon.

The cash-flow budget is a forecast of what cash you will have in the business bank account at a point in the future. The forecast will be less accurate as you plan longer into the future, so most cash flow budgets are no longer than 12 months. The forecast shows the expected flow of cash in and out of a business and calculates the bank balance at the end of each month.

Where to start

The simplest and easiest way to present a cash flow budget is on a spreadsheet.   Set up the columns with the month you want to budget.  Most cash flow budgets are for a 3 to 12 month period into the future.

The rows should be set up with:

1. your current cash balance
2. cash coming in
3. cash going out
4. the closing cash balance

Within each of 2 and 3, list the major items and make a realistic estimate of when they will be paid or received.  The closing cash balance of each month becomes the opening cash balance in the next column.

If you don’t feel confident in setting up your own cash flow spreadsheet, you can search for “cash flow budget template” on the internet where a number of free templates are available.  Alternatively, contact your Saward Dawson advisor for assistance.

Remember to include payments that don’t normally appear in the profit & loss account.  These might be capital repayments of loans, hire purchase payments, new equipment and owner’s drawings.  Similarly cash receipts from loans and sales of equipment should be entered.  Don’t forget to include the quarterly activity statement payments to the Australian Taxation Office and tax instalments.

You will need to make some assumptions as you go.  For example you might assume that creditors will be paid on 45 day terms.  By constantly reviewing actual cash flow against your budget, you will get better in forecasting and your assumptions will be more accurate.

What if the forecast shows a negative result?

You may find that the cash balance runs into negative at some point in the future.  If this is the case, firstly check your assumptions and see if they are reasonable.  You will then need to work out what payments can be delayed and if revenue can be brought forward.  In reality, creditors can often be delayed by a couple of weeks and receipts can be brought forward if proactively managed.

By altering the timing of receipts and payments you may find that the negatives are corrected.  If there is still a problem, you may need to find some cash from other sources, this may mean a temporary loan or additional capital from the owners.

Comparing actual results to budget

Your cash-flow budget is one of the most important management tools in your business.  It will highlight potential problems and, if you forecast a few months out each time, it will allow you time to plan around problems and minimise their impact.

Comparison of actual results to budget is a useful process, both in controlling costs and in improving accuracy of your forecasting skills.  For major variations, you need to ask yourself why the forecast was inaccurate.  Was there unexpected expenditure?  If so, was it necessary and why did it occur?  Could it have been delayed?  This review process will give you better management of your business and enable future forecasts to be more accurate.

Further uses of the budget

If a stakeholder or staff member is able to make decisions that will affect cash flow you can use your cash-flow budget as a management tool.  One of the key stakeholders will be the bank, and the cash flow budget is a key component in a bank’s lending review.  If you can demonstrate an accurate budget that is actively used, it goes a long way to giving the bank confidence in your business management.

Your Saward Dawson advisor can assist with the budgeting process and can also assist with finance applications and cash flow management.  Please call us for more information.

Daniel Turcato

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