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Don't have a cash flow budget? Use these 13 steps to prepare one

by , 07 October 2013
If you run a business, you must have a cash flow budget. It'll help you identify potential cash flow problems by managing your cash flow, expenses and income better. Here are 13 steps you can use to develop a cash flow budget for your business.

If your company doesn't have a cash flow budget, don't worry, the Practical Accountancy Loose Leaf has got you covered. It's provided 13 steps to make the process simple.

Use these 13 steps to prepare your cash flow budget

Step 1: When you start to plan your cash flow budget, make a list of financial elements that'll affect your business. Outline your business plan and strategy, your potential target market and project your future expenditure.

For example, consider your customers and how they'll be invoiced and your suppliers and what their payment terms will be.

Step 2: Take inventory of stock items you have. Leave these out of your budget. If you've already bought the initial retail stock, don't include this in your initial cash flow budget because it won't affect the cash flow.

Step 3: Estimate sales for your business based on history. If this is your first cash flow budget, make sure your estimations are reasonable. Check the amount of retail stock that you'll sell as part of your business process. Plan for the unexpected and be conservative.

If you're unsure of how much an expense will be, rather over provide in your budget than under provide. It could affect your budget negatively if you do. Provide for items like stationery and phone expenses even if you don't know exactly how much the expense will be.

Step 4: Estimate purchases of stock based on the expected sales. Remember to include opening stock in your calculation so you don't overspend.

Step 5: Plan and consider debtors repayment if applicable. If your customers pay by cash or credit card, there'll be no long outstanding debtors. If you have outstanding debtors, take debtors aging and applicable early payment terms into account.

If you know your clients pay only after 30 days, include them in the correct cash flow period on your budget. And remember, if you think offering an early payment discount could help the cash flow situation, do it.

Step 6: Determine and estimate income from other sources. For instance, interest income payable on financed amount over the period of the agreement or commission income payable to individuals.

Step 7: Carefully think about operating expenses applicable to your business. Prior period's expenses are always a good starting point. Take inflation and the time value of money into account.

Expenses could include:

  • Rent
  • Utilities
  • Salaries
  • Wages
  • Membership fees
  • Stationery
  • Secretarial fees
  • Accounting fees
  • Travelling
  • Insurance

Remember to include these expenses in the period in which you'll pay them and not in the period where they'll be invoiced.

Step 8: Consider capital expenditure and purchases like getting a new car or office building. You might want to complete the budget first and then determine if capital expenditure will be feasible in your business's stage of growth.

Step 9: Summarise loan and debt repayments you're thinking of engaging in. These transactions will affect your cash flow budget significantly and for a long period. You'll find most information on existing debt in your bank statements.

Step 10: Provide for the unexpected. If you know about a possible transaction that might affect your budget, make provisions as close to the expected amount as possible. This'll ensure you've taken all transactions into account.

Step 11: If you're in a positive cash flow position, you've budgeted and planned successfully. If your cash flow's negative, make adjustments to ensure the cash flow becomes positive.

Step 12: Analyse your budget. Remember cash flow budgets only determine if your business will have enough cash to cover its expenses. It doesn't factor in non-cash items like depreciation.

Your Income Statement may indicate you're making a loss even if you're on budget and your cash flow's positive. A combination of financial statements will give you the bigger picture of the financial health of your business.

Never view your financial statements or budgets in isolation. If you do, your figures won't be accurate.

Step 13: Review your cash flow budget regularly to ensure it's still applicable and appropriate. Use these sources to ensure it's still appropriate:

  • Bank statements;
  • Debt financing statements; and
  • Till cash receipts.

It's that simple. With these steps, you'll never go wrong when preparing your cash flow budget.

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