I think it would be safe to say that cash flow is one of the key issues facing businesses today.  In addition to understanding the concept of cash flow — and how it impacts your business – you must be able to plan for it and manage it.  The best way to do this is by having a cash flow budget.

Business owners are often daunted by the process, therefore many try to weather the storm of business without one.  This often leads to inefficient management of business finances, and stress.

Following are some tips in relation to preparing your Cash Flow Budget.

1. Prepare your annual profit and loss budget.

• Your P&L budget should cover at least a 12 month period, and be broken down to at least monthly.
• This can be based on historical data, factoring in expected growth.
• For new business, research will be required, and benchmarks for like-businesses may be useful.
• Start with the expenses, as these are usually easier to quantify than income.
• Where income is unknown, always break it down to measureable and manageable components.  Ie:  Number of coffee sales/day x retail price = daily sales budget.
• Factor in a buffer for unexpected expenditure.

2. Prepare your CapEx Budget.

• This will outline your expected capital expenditure on items such as office equipment, motor vehicles and other longer term assets during the budget period.
• These items are not included in your profit and loss budget, and will need to later be included into your cash f low budget (step 5).

3. Prepare other relevant Budgets. This may include budgets for staff training, marketing, relocations, travel and other areas in your business for which you need to allow for.  Ensure these are then accurately reflected in your profit and loss budget. These budgets will then need to be factored into the cash flow budget (Step 5). [br]
4. Identify and Quantify non profit and loss related items effecting cash flow.This commonly includes items such as tax payments, loan repayments (internal and external), owner’s drawings and injections of income from funding sources.
5. Adjust the profit and loss budget for cash flow.

• Accounts Receivable/Debtors:  Where your business offers credit terms to customers, adjust your profit & loss budget to account for the fact that not all income invoiced in a particular month will in fact be received in that month.  Ie: where your payment terms are 7 days, an invoice issued on 31 July will be captured as a sale in July profit and loss budget, but may not actually be received and banked until 7 August – or later!.
• Accounts Payable/Trade Creditors:  Where your business makes purchases on credit, adjust your profit & loss budget to account for the fact that not all expenses for which you have been invoiced will in fact be paid in that month.  Ie: where an invoice for your July telephone services is issued on 31 July, it will be captured as an expense in your July profit and loss budget, but not actually paid from your bank account until some time in August.
• Wages:  Wages need to be adjusted to account for the fact that ‘net’ wages are paid to employees, with the tax being paid to the ATO at a later time – usually quarterly. Tax should be accounted for in the actual month paid.
• Superannuation:  Superannuation should be recorded in the cash flow budget at the time paid, which is usually quarterly for a small business.
• Cap Ex Expenditure (Step 2):  These must be factored into the cash flow budget.  where the purchases are financed, account for the loan repayments.
• Other non profit and loss related items (Step 4):  Include these in your cash flow budget as they are often over-looked when business planning.

A Cash Flow Budget is key to the effective cash flow management in your business.  It can be used to identify periods during which cash flow may be an issue for the business, and allow for the development and implementation of strategies in advance.

Comparing them to actual business performance will also allow for the identification of weakness’ in your business’ cash flow management procedures.

For a copy of a great template to assist with your cash flow planning, please contact our office and we can provide you with a copy at no charge.

Happy Planning!