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 1. Home
 2. Insights
 3. Business Finance
 4. Creating a Cash Flow Budget




CREATING A CASH FLOW BUDGET

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Most companies are focused on cash inflows and generating revenue — and
rightfully so.

However, it is important to remember that money flows both in and out of a
business. Profits are just one part of the equation, as businesses have monthly
expenses and debt obligations they must meet.

A cash flow budget is a vital tool for measuring, managing and balancing income
vs. expenses. Every organization should be capable of creating and using these
financial planning tools.

The importance of having a cash flow budget

Business owners must pay strict attention to their reserves to ensure they
always have enough cash on hand. This is called cash flow budgeting, and it is
an important process for every organization, from traditional manufacturers to
entirely virtual operations.

Cash flow budgeting is the practice of tracking all cash inflows and outflows:

 * Inflows are your cash receipts: This includes any accounts receivable
   expected within a certain period of time, immediate payments made to a
   business and income from other services.
 * Outflows are the fixed and variable costs that companies incur: This includes
   everything from electricity and gas payments, insurance premiums and building
   rent to equipment fees and employee wages — essentially, any expense.

Developing your cash flow budget is a matter of adding up your projected cash
inflows and subtracting your outflows monthly or more frequently. The remaining
balance is your cash on hand or cash flow. If it is a positive number, you are
effectively managing expenses. If it is negative, there are issues.

While it may be difficult to identify and cut unnecessary costs and take other
specific actions that shift cash flow to the positive category, the insight
provided by a cash flow budget is invaluable. When a problem is evident, it can
be further defined and analyzed before a business attempts to address it. In
cases where a company doesn’t have the necessary visibility into its cash flow
projection and position, a concern can sit unnoticed, growing more serious until
severely negative consequences become apparent on an income statement.

Steps to creating a cash flow budget

To create a cash flow budget on a weekly or monthly basis, you can simply:

 1. Use a basic spreadsheet application or software.
 2. Tally up what you expect to receive from accounts payable, recurring revenue
    and carry-over surpluses.
 3. Add together your expenses; estimate your variable expenses to the best
    extent that you can. Consider overestimating slightly to leave wiggle room
    in your cash flow budget.

After calculating your cash flow budget, you will have identified your cash
reserve, also called net cash flow. Your company can draw from this sum for ad
hoc costs, reinvestment in your business and other cash needs.

A cash flow statement is a document depicting your inflows and outflows. It is
mandated for publicly traded companies to file such statements with regulatory
authorities. While small businesses may not be required to provide statements,
there are benefits to cash flow tracking. For one, visualizing cash flow can
help you to better manage it. Also, potential investors generally demand that
level of insight into operations before extending financing.

Effective cash flow forecasting

Cash flow budgeting is critical because profitability on paper does not always
translate to real-world income. A business can have high annual revenue and
strong overall profitability but still be left scrambling to address debt in the
short term without sufficient cash flow.

For instance, consider industries where clients typically pay a month or two
after services were rendered or goods were provided, a common arrangement across
the economy. A new account that leads to substantial sales can make company
leaders feel like all is well. However, a cluster of bills due in just a few
days or a major unexpected expense, like repairs after a natural disaster, can
arise before those funds are received. The promise of payment in full does
little, if anything, to return things to normal as quickly as possible or keep
the business in the good graces of key service providers.

Companies that regularly face this type of issue have to contend with long-term
risks like supporting strong vendor relationships, avoiding fees and penalties
and, most important of all, maintaining basic business continuity. While there
are many root causes of inconsistent and negative cash flow, forecasting is a
critical step in revealing the existence of a potentially serious issue.

To avoid such problems, it is essential to use cash flow forecasting. This
process is basically the same as crafting a short-term cash flow budget.
However, with a cash flow projection, you are looking ahead at the months,
quarters or years to come.

How to use cash flow forecasting

Businesses can model different scenarios from a cash flow perspective to
determine their viability. Including a major potential expense like an equipment
upgrade, construction of a new facility or a significant hiring increase in a
cash flow forecast will help decision-makers understand how moving forward can
impact the cash on hand needed for established expenses.

Projecting cash flow variables ahead of time can help businesses better track
and allocate assets, as well as protect their solvency and ability to meet
obligations. For instance, adjusting cash flow expectations to account for
upcoming seasonal changes could prevent a harsh winter and high energy costs
from creating balance sheet problems. This type of insight can even help
business leaders address more widespread issues that arise independently of the
company’s own decisions and operations, such as a recession.

It is also a good idea to construct forecasts for when large debts or loans come
to bear. Unexpectedly slow revenue or late payments could affect your ability to
make those debt payments.

Learn more about cash flow budgeting with Comerica Bank

All told, cash flow budgeting is a must for businesses. It provides valuable
insight into operations and financial management. However, it can be a complex
process with many different factors.

If interested in improving your cash flow management, talk to Comerica Bank
today about services and products that can assist.



This information is provided for general awareness purposes only and is not
intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information
contained within has been compiled from source[s] which are believed to be
reliable and accurate, Comerica Bank does not guarantee its accuracy.
Consequently, it should not be considered a comprehensive statement on any
matter nor be relied upon as such.


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