While many different paths exist to gain money to operate your business, the fact is that all businesses need cash to survive and grow. “Cash Flow” is the way cash runs your business and ultimately determines it’s long term survival or potential downfall.

Measured over a specific period of time-by month, quarter, or year- a cash budget detects financial patterns of the money you accumulate and how it’s spent. The most optimum goal is the ability to maintain enough cash for business operations and existing liabilities without leaving any cash unproductive.

To create a thoroughly detailed and effective budget, it’s important to that you entirely understand this tool and how it can be used to it’s best potential.

Main Purposes of Cash Flow

• Indicates where cash flow is being wasted

• Signifies when it’s time to raise prices.

• It identifies exactly how much cash flow the business needs to do better than break even and ensure adequate profitability

• It helps business owners plan for the future

While it’s not possible to precisely predict cash flow in any month, the procedures of creating a budget based on previous years’ cash flow will help you better plan and predict for the future.

Short-Term Financial Planning
Usually developed on a monthly basis, the cash budget is one of the primary tools leveraged in short-term financial planning for cash flow. A comprehensive cash budget allows the business owners to see short-term financial needs and develop adequate opportunity for the business.

For example, one month the firm may have extra cash and be able to save some money in a money market fund. Another month, the firm may have a shortfall and have to withdraw some money from savings or apply for a short-term bank loan to cover its needs.

Many business owners convey their expected sales revenues and expenses on a month-by-month basis to serve as a helpful short term planning tool by calculating their excess cash or cash shortage at the end of each month.

Three Main Elements
Here are the three elements involved in the process of developing a cash flow budget.

  1. The amount of time for which you are developing the budget
  2. The amount of cash you want to keep on hand acknowledging the nature of your business, the flow of accounts receivable, and the possibility of significant change, such as an unexpected opportunity or venture.
  3. Estimated sales and expenses within a time period. Remember that your cash budget will never be completely accurate-as sales and expenses are estimates-but over time you’ll develop better forecasting abilities in the future years.

After preparing your cash budget, compare it to your company’s existing performance. Comparing your budget to outcomes provides you with definite difference in your predictions and real life outcomes. Additionally, this comparison will give you the information needed to adjust the cash budget for this period and refine your budgeting for the next period. You’ll almost certainly need to tweak the budget as changes occur based on unexpected expenses.

The truth of the matter is that your business will never be given the opportunity to thrive without concrete financial resources encompassing cash flow, cash position, and accuracy of the cash budget. Without properly maintaining these crucial tools-or having them in place at all-there’s an increased possibility your business can become cash poor or find it with wasted money.  Consistently tracking your financials while managing all other areas of your business creates more room for error and potential downfall for your business. Running off your passion to change the world with your business, leverage resources to assist you where you find headache. Our team of professionals at MCDA CCG, INC. offer a wide variety of financial services and consulting to ensure that your business is operating at it’s full potential while maximizing it’s profits. Contact us today to speak with a financial advisor; our consultants will assess your current situation and devise a personalized approach to improve the way your cash is managed.

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