What is a Cash Flow Budget?

The cash flow budget may be a complex character to work with. However, it is important to know of, to assess the financial viability of the company. I will give you a short introduction to the cash flow budget, why it is important to know of, and what to use it for in your company.

What does cash flow mean?

Talking about a cash flow budget, it is above all important to be familiar with the terms liquid capital and cash flow or liquidity. Basically, a company is considered liquid if it can pay the expenses to come. In other words, the term liquid means the overall financial state of the company. The company cash flow must be seen as the relation between current assets and short-term debts.

So, the company cash flow or liquidity means the net disposable amount of the company. The term cash flow or liquidity can be used as an indicator of whether a company is able to buy products and pay its bills. In other words, does it hold liquid funds in sufficient amounts. If a company holds a proper cash flow or liquidity, it has a high ability to pay its bills, salaries, and taxes.

The cash flow budget provides a precise picture

A cash flow budget is an overview of your company’s projected receipts and expenses. It is typically based on the company’s purchase and sale of assets, as well as settling or raising of debt. As it requires an idea of your expected income, you may benefit from reading about sales forecasting here. In this article, we will guide you to make qualified guesses as to your future sales.

…Now, back to the cash flow budget

That was a brief digression about sales forecasting. Let us get back to the cash flow budget and how to use it. A cash flow budget will give you a detailed overview of which months or periods you need liquid capital and when you have excess funds. A cash flow budget is typically based on the company operating budget. The most significant difference is that the operating budget does not consider when you get receipts or pay expenses. The cash flow budget does. It provides a much clearer indication of when you have liquid funds available and when not.

Why is it important to make a cash flow budget?

The primary purpose of the cash flow budget is to show that the liquid funds consistently match the expenses. It is essential to avoid unforeseen periods with lack of liquid funds in the company. Should this occur anyhow, the company may for example be able to remove or postpone expenses. The ideal scenario is, however, month by month to make sure that you have sufficient liquid funds to pay the various expenses.

A realistic operational budget is also essential

As mentioned earlier, the cash flow budget is typically based on the company’s operational budget. The operational budget is prepared based on what you expect to pay in invoices, purchases, mortgage, and taxes as well as your expected income from customers, such as sale of goods. Therefore, it is recommended to have a realistic operational budget for the preparation of the cash flow budget. Though it may be time consuming to prepare a cash flow budget, it does pay off. It is a very effective tool for assessing whether your company is financially viable. The cash flow budget always provides a good overview of the running income and expenses. Ultimately, it might help prevent from bankruptcy, as you will be able to correct solvency issues in time.

The cash flow budget may also help decide the right time to make large investments and, in that way, expand the business. This type of budget will constantly give you an indication of whether your plans are realistic and how they will affect your business.

Getting started

There are different approaches to getting started preparing your cash flow budget. If your company is well off in years, it may be an advantage to use earlier financial statements as basis. In that way you can ensure that your expectations for in- and outgoing payments are realistic. And when it comes to preparation of the cash flow budget mentioned in the previous section, the operational budget should be included as an important element.

However, the operational budget is especially important for new entrepreneurs or for those working in new-established businesses. In this case, it is highly recommended to use the operational budget as foundation, as it will be a good indicator of your income and expenses.

New to the market or not, it is important to be very accurate when preparing the cash flow budget. Both small and large expenses should be included in the budget, even if the small expenses seem too small to be included. Over a one-year period these small expenses may mount up to a lot of money, and including them from the beginning, may help avoiding unpleasant surprises.

Use InfoSuite for cash flow budgeting

As mentioned at the beginning of this article, a cash flow budget may be a difficult and time-consuming discipline to work with in practice. At InfoSuite, we have developed a solution that handles the complex calculations for you. With this solution, you will have the best possible overview of your company’s cash flow as well as your solvency month by month for the entire year to come.

A tool for easy and efficient cash management

If you are interested in learning more about saving time and resources in the demanding task of preparing a cash flow budget, we are always ready to discuss how InfoSuite can help. If you want to try InfoSuite as a tool for cash flow budgeting, download our free demo here.

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