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Budgets: Part 4 - Cash Flow

Posted by administrator on Tuesday, April 29th, 2008

Since our recent posts on budgets we have had many interesting questions presented to us. One frequent question is: How can you budget cash flow? We all know that cash flow is the blood of every business. Without adequate cash flow life can be the pits.

A quick recap on the definition of cash flow is the following: Money coming in from any source matched to money going out of a business. Do you have enough cash to pay your bills or are you short?

For over 30 years we have worked with many types of businesses. We have learned both valuable and painful lessons. One of which is the importance of: Developing a cash flow plan (budget) for your business. Then, at least on a monthly basis(for the current year) figure out what money is coming in and going out, account by account. Project your money collections and what money is being paid out to operate your business. Do they match? Are you short of money or have a surplus?

If you are a cash basis business, it's simple. Your money coming in should at least match the money going out. Is it enough to pay current bills or do you need to delay payment or borrow operating money?

If you are an accrual business and are having great sales that may not be enough to keep your business afloat. The fly in the ointment is... are you collecting your accounts receivable at least at a rate that you need to pay your bills which are your accounts payable?

A cash flow budget is a plan to collect money from sales which is then used to pay the expenses incurred while generating those sales. If you have a surplus of cash during business operations invest it. Eventually you will be able to draw on these funds during periods when cash collections do not cover your bill payments. Should your sales and collections of receivables not cover your bills to stay in business you will need to borrow funds. Most businesses need to do this from time to time.

Your life will have less stress if you have a cash flow budget. Your backers or banker will be happier to know that you have an understanding of when you will be short of cash, and when you will have a surplus. Figure it out and plan it out.

If you need help with budgeting cash flow, send us an email at either cdi@srv.net or snap@srv.net and we will send you some links, suggestions and possible solutions.

Category: Budget