Cash budget

The cash budget (or cashflow forecast) uses the information in the sales and expenditure budgets to forecast the money going into and out of your bank account each month.

The cash budget (or cashflow forecast) uses the information in the sales and expenditure budgets to forecast the money going into and out of your bank account each month.

What is the timing of cash movements?

– When will the money from your forecast sales actually arrive?
– Should you allow for a percentage of bad debts (sales which are never paid for)?
– When will you pay out for costs such as salaries, equipment and raw materials?
– Some payments will have to be made in advance (eg rent, rates and insurance) or by monthly standing orders.

What other money will you be receiving and paying out?

– Finance, eg receiving grant payments or repaying a loan.
– Any capital expenditure.
– Tax payments or rebates.
– VAT payments or receipts (if you are registered for VAT).

Using these figures, forecast your bank balance at the end of each month.

Balance sheet projections

While you are working on budgets, calculate the effect of meeting them on your assets and liabilities.

This will provide you with an internal check on their consistency.

It will provide you with management information.

– For example, it will show how much you are likely to be owed by customers at the end of the period, or how much you are likely to owe suppliers and HM Revenue & Customs for VAT and PAYE/NIC. It will provide financial information for prospective backers.
– For example, your bankers will need information on your prospective balance sheet before they decide to lend to you. It will focus your mind on the need for capital spending.

It will show the impact of depreciation on the balance sheet value of new cars, equipment and other fixed assets.

Preventive measures

Drawing up a budget enables you to spot problems before they happen.

Are you in danger of underperforming?

– Does your business need to build up sales as rapidly as possible?
– Will your forecast costs be too high?
– Where is there scope for cutting back?

Does your cash budget show that you are going to exceed your overdraft limit in any month? How will you improve cashflow?

– Collect sales income faster.
– Delay payments to your suppliers.
– Would this lose you discounts or damage your relationships with them?
– Arrange extra finance.
– Delay new capital expenditure.

Are you over-trading?

– The higher your sales, the more money you will need to spend on supplies and other costs ? before being paid yourself.
– If the level of sales becomes too high, your business may simply run out of cash.
– There is no point in capturing huge orders, if you run out of cash and go bankrupt.