A Guide on How to Create Cash Flow Budget for Business

Introduction

Crafting a cash flow budget for your business is like creating a roadmap for financial success. It’s not just about numbers; it’s a strategic exercise that empowers businesses to manage the complexities of financial management with accuracy. 

In this blog, we will explore the strategies needed to create a robust cash flow budget that serves as the foundation for sustainable growth.

What Is A Cash Flow Budget?

A cash flow budget assesses inflows and outflows over a specific period and provides a foundation for future financial planning. Acting as a starting point for evaluating liquidity, the budget forecasts cash movements over a defined period, be it weekly, monthly, quarterly, or annually. 

It is important to note that a cash flow budget provides an estimate rather than an exact figure, serving as an informed projection. It is a valuable tool for businesses to determine if they have the necessary cash for both short-and long-term operational needs. 

What Is Included In A Cash Flow Budget?

A cash flow budget starts by incorporating all incoming and outgoing cash transactions your business anticipates during the specified period. These include: 

• Sales forecasts: Predictions of future sales revenue.
• Loan payments: Scheduled repayments of borrowed money.
• Tax payments and refunds: Money paid to or refunded by tax authorities.
• Operational expenses: Costs incurred to keep the business running day-to-day.
• Accounts payable: Money owed by the business to suppliers or creditors.
• Accounts receivable: Money owed to the business by customers or clients.

The specific time frame for which businesses are planning to create the cash flow budget plays a crucial role in determining which transactions should be included. For example, for short-term cash budgets, the focus lies on items such as payroll, operating expenses, investments, utility bills, and rent. Conversely, for long-term cash budgets, businesses need to consider factors like long-term investments, taxes, and capital expenditures for projects. 

4 Key Steps To Create A Cash Flow Budget

To reap the maximum benefits of cash budgeting, it is necessary to learn how to create an effective cash flow budget in the first place. Follow these steps to build your cash flow budget:

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  Step 1: Determine the forecast duration

  
  

  It is essential to identify the time frame for your planning. You can try doing it weekly, monthly, quarterly, or annually. 

  
  
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  Step 2: Estimate incoming cash

  
  

  Evaluate the total income for the period and categorize them based on their source and when the necessary payments were received..

  
  
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  Step 3: Predict outgoing cash

  
  

  Estimate your total expenditure for the period, detailing the sources and time frame for clarity.

  
  
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  Step 4: Organize your cash

  
  

  Compile all these expenses in a spreadsheet and divide the total income by the total number of months to arrive at the monthly income rate. After that, subtract the total expenses to arrive at the surplus or deficit over this period.

  
  

After following all these steps, you’ll be able to see if your cash flow is positive or negative. Ideally, one should be able to finish the period with a positive value for the reserve. This indicates that your business has more cash than is required to meet its operational needs; hence, one can use the excess to expand the business. When this value is negative, it suggests a cash deficit, and organizations might need to look for alternative income sources or reduce some expenses.

Cash Flow Budget Example

Here’s a cash flow budget example – A software development company, XYZ, is looking to project its cash flow budget for the last quarter of the year. 

The sales figures for the same three-month period last year were as follows:

• October: $50,000
• November: $60,000
• December: $70,000

This year, with new client acquisitions and an expanded service offering, XYZ anticipates a 4% increase in sales during October and November and a 6% increase in sales during December. The projected sales figures would then be:

• October: $52,000
• November: $62,400
• December: $74,200

Here’s how to create a cash flow budget format specifically for December:

XYZ’s accounting team starts by summing up all cash inflows, which include projected sales alongside payments from clients and interest earnings. The total cash inflows amount to $85,000, with projected sales accounting for $74,200 of this total.

Moving on to cash outflows for December, which encompass expenses such as office rent, software subscriptions, loan repayments, employee salaries, and marketing expenses. The total cash outflows amount to $55,000.

This leaves XYZ with a projected cash flow budget surplus of $30,000 for December.

Tips On Managing Cash Flow Budget

Cash flow budgets are invaluable for boosting savings and profitability. Here are some effective tips for managing them:

• Implement the 50-30-20 budgeting strategy: Allocate 50% of your income to essentials (like office rent and employee internet), 30% to discretionary spending (such as office décor and furniture upgrades), and 20% to company savings.
• Trim expenses strategically: Identify areas where cost-efficient alternatives are available and streamline your spending accordingly.
• Opt for automated savings: Set up automatic transfers to a savings account. This ensures consistent contributions without the hassle of manual transfers, enabling your savings to grow effortlessly as your income increases.

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Our Cash Management Software automates the reconciliation process between bank statements and internal financial records, reducing manual effort and errors and increasing cash management productivity by 70%. With our treasury and risk solutions, treasury professionals gain instant, personalized insight into their cash positions with unparalleled global visibility. 

FAQs

1) How to calculate cash flow in capital budgeting?

To calculate cash flow in capital budgeting, subtract initial investments from future cash inflows over the project’s lifespan. Include revenues, cost savings, and salvage values while deducting operating expenses, taxes, and capital expenditures. The resulting net cash flow indicates the project’s profitability and viability.

2) How to make a cash flow budget in Excel?

To create a cash flow budget in Excel, start by listing all income sources and categorizing expenses. Use separate columns for each month or period and input the corresponding amounts. Calculate net cash flow by subtracting total expenses from total income for each period.

3) What is the primary purpose of a cash flow budget?

The primary purpose of a cash flow budget is to track and manage the flow of cash into and out of a business over a specific period. It helps businesses anticipate financial needs, identify potential cash shortages, and make informed decisions to maintain financial stability and achieve their goals.

4) How is a cash flow budget different from a regular budget?

A cash flow budget tracks the timing of cash inflows and outflows over a defined period, ensuring liquidity management. In contrast, a regular budget encompasses all financial aspects, focusing on revenue, expenses, and profit projections without emphasizing cash flow timing.

5) How to create effective cash flow budgeting for business?

To create an effective cash flow budget for your business, start by forecasting sales accurately, accounting for all expenses, including loan and tax payments, and managing accounts payable and receivable efficiently. Regularly review and adjust your budget to maintain financial stability and plan for growth.

6) Who needs a cash flow budget?

Anyone managing finances, from individuals to businesses of all sizes, can benefit from a cash flow budget. It’s crucial for anticipating financial needs, identifying potential cash shortages, and making informed decisions to maintain stability and achieve financial goals effectively.