In the words of Ralph Waldo Emerson, “Money often costs too much.” At ForwardAI, we heartily agree: Cash flow is the best indicator of your business’s financial health and if you don’t watch it carefully, the price can be steep.
Having as many insights as possible about how cash is going into and out of your business is crucial to understanding both the short- and long-term odds of survival. Putting together a cash flow budget it part of that.
A cash flow budget — or cash budget, for short — is different than a cash flow statement. It’s luckily simpler to put together, but just as necessary to understand your runway.
Table of Contents
- 1 A cash flow budget explained
- 2 Cash flow budget ≠ cash flow statement
- 3 Where your cash flow budget fits into the big picture
- 4 Do you need to make adjustments to your overall budgets?
- 5 Practical ways to use a cash flow budget
- 6 How to create a cash budget
- 7 How your business can use a cash flow budget
- 8 Make the right adjustments
- 9 Short-term cash projections help with a long-term strategy
A cash flow budget explained
At its simplest, a cash budget lets a business understand whether or not it has enough net working capital to operate during a fixed window of time. Because you’re assessing liquidity for operational solvency, businesses generally perform cash flow budgeting every month. (Quarterly can work, too, though ForwardAI recommends sticking with monthly assessments to get the best data you can.)
To calculate your cash flow budget, you’ll look at your estimated cash inflows and outflows over the period of your choosing. That’ll include what you forecast you’ll spend on products or services and operating expenses, plus what you expect to make (and actually get paid out).
If your sources of cash exceed your uses, you’ll have a positive cash position. Vice versa, you’ll be in a negative cash position. You’ll also be able to see your estimated cash position at the beginning of your next cash flow budget period (depending on how often you keep them).
Cash flow budget ≠ cash flow statement
A cash flow budget might sound similar to a cash flow statement, but it’s definitely not. That’s an entirely separate document.
Your cash flow statement is an essential accounting document that you’ll need to keep alongside your cash budget. Part of the trifecta of most important financial statements, your cash flow statement — or statement of cash flows — is a more complex, formal document. It also pulls from your other financial statements, so if there’s a substantial change to your income statement, it’ll affect your cash flow statement as well.
As cash flow is the lifeblood of your business, you need to keep your cash flow statement as current as possible. A best practice is to update it each month before running your cash flow forecast. This way you can ensure that the data in your forecast is up to date.
Where your cash flow budget fits into the big picture
Your cash budget gives you a sense of your short-term operations. Your cash flow statement, on the other hand, is taking a look at your cash solvency over a longer duration. You can think of your cash budget as a management tool where you’re watching your costs, supplementing the overarching formal statement of cash flows.
Only together will your company have the insights it needs to make the right decisions about your cash flow and the future of your business.
Do you need to make adjustments to your overall budgets?
That’s what cash flow budgeting can tell you when used in tandem with your cash flow statement. (Plus, adding cash flow forecasting to the mix gives you just one more piece of the picture, helping you track patterns in your data, like whether your accounts receivable is out of sync with your accounts payable, for instance.)
Practical ways to use a cash flow budget
Let’s say you run a company that manufactures and sells contemporary rugs. You’d use your cash flow documents — statement, budget, and forecast — to keep track of your operations.
- You cash flow statement will serve as your foundation to show how many synthetic rugs you’ve sold, how much it cost you to make them, and during which period of time this cash came in or went out.
- Your cash flow forecast will be your resource to evaluate and determine your cash trends, like when your margins are synthetic rugs are highest.
- Your cash flow budget will help you manage short-term costs, especially within operations.
These documents will all inform each other. For instance, if you understand your margins from your cash flow forecast, you’ll get insight into the things that affect your cost of goods within your cash budget. Using them together, you’ll be able to optimize your cash flow.
How to create a cash budget
In order to put together a thorough cash flow budget, you’ll need to gather information on your projected inflows and outflows. Most simply, you’ll need a topline on your receivables and expenditures to calculate your net cash flow.
Here’s a basic cash flow budget template to get you started:
Part I: Cash outflows
- Marketing and sales
- Rent or property payments
- Misc fixed expenses
- Accounts payable
- Asset purchases
- Loan payments
- Other short-term or installment payments
- Misc expenditures
Part II: Cash Inflows
- Beginning cash balance
- Accounts receivable
- Business revenues
- Asset sales
- Misc income
- Shareholder equity (FYI: this only applies if you’re incorporated with shareholders)
Part I —Part II = Net Cash Flow
Note that this is only an example. Due to the nature of your business, you might be adding many more — or fewer — line items. But the point here is to show the kind of elements that comprise your cash inflows and outflows. This number will also give you a starting point for your next month.
What’s also important to note is how net terms (also known as trade credit) can have a significant impact on your cash flow budgeting. Since your cash budget is measuring the short-term, and you might be either extending or paying on net terms of 30, 60, 90, or even 120 days, your cash flow can be significantly affected when these invoices are either paid or due, respectively. Especially if they’re broken up into deposits and collection on delivery (COD).
That’s one of the reasons keeping a monthly cash flow forecast, along with a longer-view cash flow statement, is necessary.
How your business can use a cash flow budget
A cash flow budget is yet another financial document. So, if you have your stuff together, you don’t need to do it, right? Well, if you 100% want to stay in business, we’d really, really strongly advise that you do.
More seriously, though, without detailed insights about your cash flow management, you won’t be able to know what changes to make to your cost centers in order to keep the doors open. The more data you have about your financial position, the better. And that’s what a cash flow budget provides you.
Make the right adjustments
For instance, say you go along with ForwardAI’s advice to do your cash flow forecasting for the month. (Good idea.)
Perhaps, after running the numbers, you end up with a projecting a negative cash position. That’s not great news, no. But it does empower you to do what you need to do to obtain the capital you need. Maybe that’s free up capital tied up in trade credit with invoice factoring or apply for a business line of credit.
Short-term cash flow budgeting also allows you to understand your cost centers more intimately. As a business owners working to better manage your net cash flow, you’ll be able to focus in on where you’re spending monthly and why. Is your cost of goods sold (COGS) rising faster than expected because of market conditions, or something else? Do you maybe have a larger buffer than your expected to be able to bring on extra help?
Short-term cash projections help with a long-term strategy
Smart entrepreneurs will also create cash flow budgets for several months in advance using projections for future cash flow. This’ll let you be prepared for any future issues — and spot cash flow gaps. The sooner you can see where your business might come up short, the faster you can act to mitigate issues so they never arise.
In order to have the most detailed data you can to create highly detailed cash budgets, you’ll need cash flow forecasting tools available. ForwardAI provides the insights entrepreneurs need to prepare themselves for every cash flow scenario, and take out the guesswork involved in making ends meet.
Signing up for ForwardAI is easy. Just create your free account, connect your business and run your forecast.
The information in this article is not financial advice and does not replace the expertise that comes from working with an accountant, bookkeeper or financial professional.
Images via Pexels