Cash flow budgeting: a must for your business

7 września 2022

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Cash flow budgeting: a necessity ...

Any company that aspires to sustain itself over time, either taking advantage of boom periods or facing economic downturns, must consider the importance of defining a cash flow budget. This practice has certainly become popular among the most successful businessmen and if you aspire to be one of them, we invite you to consider, with this article, its importance.

A cash flow budget (meaning the same thing), as we will see, is applicable to any business management model, either to protect a business from bankruptcy or to expand, in the opposite case, its areas of managerial action.

Cash Budget = Cash Flow

As a general rule, what we understand as cash budget corresponds to the same notion as cash flow. In fact, we can also refer to it as projected cash flow, since it plans, estimates or conceives the inflows and outflows of money by a business over a given period of time.

What is a cash flow budget

The cash flow budget is a type of technical document that seeks to foresee all the cash inflows and outflows in a business, in a determined time, with the objective of enjoying an optimal business administration.

Its terms are variable (weekly, monthly, bimonthly, quarterly, four-monthly, six-monthly or annual) and many times the most important decisions within a business are made by looking at the indexes that this record shows.

Usefulness of the cash flow budget

Following its definition, the advantages of making a cash flow budget vary. First of all, this tool helps to answer the question of what is the best financial path to follow in a given time frame. In addition, its nature allows it to cope with the various fluctuations in the overall economy and allows for both deficits and surpluses during certain periods of the fiscal year.

Importance of the cash flow budget

Broadly speaking, the implementation of a cash flow budget is vital to keep any business active. Thanks to it, it is possible to effectively manage cash inflows and outflows and to set the minimum necessary to sustain its operations.

And part of its raison d'être also lies in the fact that the merchant can keep up with its financial obligations, in addition to knowing whether its finances are close to a surplus or a deficit of money, which will invariably set the course of action to be taken by the company.

On the other hand, the importance of cash flow is that it is a necessary document to improve expense management, maximize available resources and assets, make the best decisions when making investments and contemplate the risks of certain expenses.

Characteristics of the cash flow budget

To properly prepare a cash flow budget, the following points should be taken into account:

Estimate partial and total payments to both suppliers and creditors that are vital to the business line.
Project the sales or subscriptions of the business.
To fix the minimum amounts of income that guarantee the operability of the company.

By taking these factors into account, the execution of a cash flow budget capable of keeping any commercial activity afloat becomes plausible. This is because it ensures the minimum conditions for its correct operation, thus avoiding the disappearance of liquidity, an issue that becomes vital to face periods of low market capitalization.

What to do if we foresee that we will have a deficit

A deficit is never good news for any business. However, falling into one does not mean the end of the world by any means. Let's see what you can do in case your business finances are in this situation:

Evaluate the possibility of applying for financing.
Negotiate the best way to refinance all debts and passive expenses.
Opt for a commercial credit with the bank or ask for increases in the line of credit of the business.
Increase income with cash collections and suspend any type of credit to customers.

What to do if we foresee that we will have a surplus

Every merchant's dream situation: having a cash surplus. In this situation, the most important thing is not to get carried away by impulses and use the money wisely. Let's see what you can do when your business finances are in good health:

Invest it in machinery or equipment that optimize management tasks.
Purchase more goods.
Expand the boundaries of the business.
Acquire shares in other companies to increase the level of influence of the commercial brand.

Examples of cash flow budgets

Perhaps it can be thought that businesses that bet on volume, with retail sales, are the ones that need a cash flow budget the most, since if they do not do so , they run the risk of suffering from the disruptions of poor business management.

Let us now analyze the cash flow statement with a practical example that will help us to illustrate these budgets, such as that of medical consortiums. It is true that this type of business, given its characteristics, enjoys a constant cash flow. Therefore, it is essential to determine the scope and objectives of the commercial budget, not only to forecast the volume of cash required by the company, but also to evaluate whether the relationship between income and expenses has been satisfactory.

The importance of the cash flow statement also applies to theoretically smaller businesses, such as a cosmetics store . In this type of business it is peculiar that most of the cash inflows are made in cash, even though the payment to suppliers is probably not made in this way. Therefore, cash flow must be important in order to meet customers' demands for change.

Steps to create a cash flow budget

To create a cash flow budget we recommend you to consider the following points:

Hire a work software that facilitates these tasks: From AgendaPro we recommend you to implement a software that makes it easier for you to do these tasks . our management softwarewhich you can try for free here. In addition to allowing you to record all cash inflows and outflows, it helps you to simplify operations and reduce any calculation errors that may occur. As such, the digitization of this type of processes in companies has a large number of followers, who recognize the advantage of this type of tools.
Define the periodicity of the budget: The timing of businesses often depends on their intrinsic needs. Many enterprises are tied to the times of the year in which they are launched. Thus, they must seek the optimization of work and the fulfillment of the goals they can set for their business. After defining these aspects, it is feasible to determine whether the periodicity of the budget will be weekly, monthly, bimonthly, quarterly, four-monthly, six-monthly or annual.
Anticipate sales: To do this, you must identify all possible sources of income for your business. Consider that sales often depend on the market situation in your industry. A good demand forecast analysis can help you set a sales estimate.
Predict cash receipts: Whether you receive payments in cash, through debit cards, credits, promissory notes, digital currencies or even if you decide to bet on the partial collection of goods and products that your company offers, it is essential to account for them. It is extremely important, since its lack of control can lead your company to strong discrepancies between sales invoices and actual cash flow .
Estimate expenses: In order to survive, every business must set a maximum amount of expenses to avoid going into the red. These are called financial obligations, and they can be variable since the same amount of money is not always invested in marketing, inventory replenishment, office supplies, membership payments or exceptional repairs. Likewise, there are expenses that are unavoidable, such as employee payroll payments, rent, loans, insurance policies and the calculation of profits.
Record the final balance: To do this operation, the total inflows must be calculated and contrasted with the cash outflows (payments, investments, miscellaneous services). The difference between these two values is what we can understand as the final balance of the cash flow.
Set a minimum operating balance: This figure varies depending on the business, the line item, the scope and the merchant's budgeted needs. The minimum cash flow balance is the borderline between a theoretically positive business economy and the so-called cash deficit.

As a conclusion, we must consider that a cash flow budget is in the obligation to review both the income and expenses of your business within a given time frame.

In turn, these depend on variables that inescapably respond to the financial projection of the company and that, in the long run, can save your business from any crisis that you may go through or boost the brand to compete with the best in the field in the always difficult business field.

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