Creating a Cash Flow Budget

April 13, 2016 | Roger and Susie Engelau

Not sure you’re going to make payroll?[p]

Have you had to postpone an important capital outlay?[p]

Need an equipment upgrade?[p]

Have you put personal cash into the business?[p]

Cash flow issues are among the most troubling issues for businesses of any size.  When sales and revenue decrease while overhead stays the same, it’s a nightmare. I know – I’ve been there.[p]

When you have people demanding payment or you can’t make the improvements and investments you need to grow your business, it can be stressful – and even downright scary.[p]

Start With a Cash Flow Budget

Cash flow issues, and even financial issues in general, can seem complex. (Try reading Simple Numbers, Straight Talk, Big Profits by Greg Crabtree for an easy-to-read and practical guide to managing your financials).[p]

A great place to start is making a Cash Flow Budget designed to keep your cash flow consistent and positive. [p]

Your Cash Flow Budget is a projection of your business’s cash inflows and outflows on a daily, weekly, or monthly basis. The budget usually includes a 6-month period.[p]

The purpose is to predict your ability to take in more cash than you pay out. This gives you an indication of your ability for expansion, to pay bills, or simply to support yourself.[p]

A Cash Flow Budget can also help you predict gaps — periods when cash outflows exceed inflows — so you can take steps to ensure that the gaps are closed, or at least narrowed.[p]

How to Make a Cash Flow Budget

Creating a cash flow budget sounds really complicated, right? In reality, it’s pretty simple.[p]

First, project your cash inflows – aka, your sales and other income. A good starting point is referencing last year’s sales. Keep in mind the things that could impact your sales on an annual basis – things like seasonal impacts, changes in your customer base, and price changes.[p]

Next, project your cash outflows – aka, your business expenses. I’d recommend sorting expenses into one of these categories:[p]

  1. Cost of Goods Sold — The cost of inventory items resold to your customers. This also includes the costs of labor and inventory items used to manufacture the end product. If your business is retail, your largest cash outflow is probably for the purchase of resale items. If you’re in manufacturing, a large portion is likely the purchase of raw materials. If you have a service business, only a small amount of your cash outflow may fall under Cost of Goods Sold.[p]
  2. Operating Expenses (Overhead) – Includes payroll, payroll taxes, utilities, rent, insurance, repairs, and indirect labor costs (management, sales, administrative staff, etc). This is the catch-all category.[p]
  3. Major Purchases – Expansions or upgrades for property, equipment, vehicles, computers, or other office equipment.[p]
  4. Debt Payments[p]

The final step is to combine your projected cash inflows and outflows create your bottom line. It looks like this:[p]
Beginning Balance + Projected Cash Inflows – Projected Cash Outflows = Your Cash Flow Bottom Line (the ending cash balance).[p]

  • The ending cash balance for the 1st month becomes the 2nd month’s beginning cash balance.
  • Determine the 2nd month’s cash flow bottom line by combining the beginning cash balance with the 2nd month’s anticipated cash inflows and cash outflows.
  • The ending cash balance for the 2nd month then becomes the 3rd month’s beginning cash balance, and so on.[p]

A positive cash flow bottom line means that your business has a cash surplus at the end of the month. A negative cash flow means you’ll either need to cut back on your cost of goods or operating expenses, postpone upgrades or expansions, or negotiate a lower loan payment. Or, it means you need a cash infusion from increased sales or a loan.[p]

When you have a foundation in place to manage your cash flow issues, you know what your current position is and what the future might hold. Your Cash Flow Budget puts you in control and gives you the confidence to act decisively. For example, one of my clients (a manufacturing owner) said, “This cash flow budget helps me sleep better each night.”[p]

Check in next week for more actionable methods to handle cash flow issues.[p]