5 Effective Ways to Improve Budget and Cash Flow Planning

Rick Johnson
August 26, 2022
|
6
 Mins Read

Forecasting cash flows and cash flow reporting utilizing actual results are two critical activities that go hand in hand. Cash flow forecasting, also known as cash flow budgeting, forms the core of the financial process of any business.

A cash flow budget guides you to make the right decisions to ensure comfortable liquidity for the business. An accurate and detailed cash flow forecast would help organizations anticipate cash flow issues and resolve them on time.

It must be noted that constant review of this forecast with actual cash flow is crucial for keeping the company afloat. An annual cash flow forecast should be continually adjusted for the timing of actual receipt and disbursement of cash.

A number of steps are required to create a cash flow budget and for controlling cash flow. There are two key factors that go into the preparation of cash flow budgeting: one is the cash inflow (receipts) and the other is the cash outflow. In order to accurately forecast these figures, you might have to make a number of assumptions about how your business will be operating. Read on to find out the steps involved in preparing a cash flow budget.

Steps Involving a Cash Flow Budget

1. Determining Cash Inflows:

  • The first step is to take your P&L statement and predict future cash receipts based on the sales figures. The best place to start would be by looking at sales in previous years. This would help identify trends and patterns in sales.
  • One can then identify internally (e.g. changing product pricing) and external (e.g. industry pricing changes) factors that might have an impact on the current period. When it comes to price changes, look at the timing and quantum of price changes. You might also need to factor in the impact of seasonality when predicting sales. For instance, a business selling air conditioners cannot expect the same kind of sales in summer and winter.
  • Once you predict realistic sales for the period, it needs to be broken down into cash receipts (i.e. when would the cash from customers come in).
  • Next is to identify the pattern in debtor remittances. To facilitate this, you could prepare an ‘aged’ list of your receivables. This would show the actual payment terms being taken. For example, you might see that sale happens in one month while the total cash is received only the next month. This is because sales might involve cash as well as credit sales and the credit could be for 30, 60, or even 90 days. For instance, you might receive 60% on sale, 20% within a month, and the rest within another fortnight.
  • Furthermore, start considering cash receipts other than those from the sale of goods and services. These could include deposits or part payments on contracts, supplier rebates, insurance claims, new loans, or cash from shareholders.

2. Determining Cash Outflows:

By forecasting your expenses, you could get an estimate of your total outflows for the year. The selling price of your products or services has to include an amount that would cover these expenses if you want to make profits. Usually, there are three types of cash outflows to consider, although they may vary from one business to another:

3. Overhead Expenses:  

These are also known as fixed costs because they do not vary much with the level or volume of sales or they have no correlation to sales. These expenses are usually paid on a monthly basis and include items such as salaries, electricity, stationery, rent, and phone bills.  Even though expenses might change during unusual periods, they generally remain within a range. For instance, utility bills might go up during particular seasons.

4. Variable Expenses:

These expenses change along with the sales volume or the inventory levels. Variable expenses might include raw materials, direct labor, and other such costs. These costs should be forecast as a percentage of sales. For example, assume your cost of goods sold (COGS) is 60% of your selling price and you decide to keep a quarter’s supply of goods on hand. Suppose you forecast $200,000 of sales in the first quarter, you would need $120,000 worth of goods (at cost) as part of inventory before the quarter begins. However, this does not take into account the cash paid for such inventory. Costs associated with inventory are several and might not be paid at the same time. For instance, direct labor, if you run a manufacturing firm, would have to be paid early, while raw materials can be obtained on credit ranging from a week to 90 days or more.

5. Other Expenses:

Some other expenses might require you to pay cash. However, they might not be incurred regularly or could be a one-time expense. These would include expenses like the purchase of machinery or equipment, dividends, insurance premiums, or training programs. These also need to be taken into account for accurate cash forecasting.

1. Preparing the Cash Flow Budget:

  • It is best to prepare a cash flow forecast for a minimum of 13 weeks into the future. This is because most organizations do not have enough financial strength to survive even a short-term cash flow crisis. For large or complex organizations, a monthly forecast could be prepared for a minimum of six months. Only for very large organizations, annual cash flow statements could be looked at.
  • Start with the simplest of forecasts. You could scale as you gain control. If you prepare the budget in the right way, forecasting should not be too tough. Once you have a cash flow forecast, you must share it with key staff members. This would help you achieve your goals on time.

It is evident that an organization's success lies in finding a successful balance between producing profits and effectively managing its cash flows. Cash flow management is the core of any successful business and effective cash flow management depends on forecasting with accuracy.

Other Finance & Accounting Blogs

9 Proven Strategies for Effective Debt Recovery Follow-ups
9 Proven Strategies for Effective Debt Recovery Follow-ups

Debts can cause your business to struggle. Discover 9 proven strategies for effective debt recovery follow-ups to boost financial resilience.

December 7, 2023
Finance & Accounting
Importance of Invoice validation and Best Ways to Streamline this Process
Importance of Invoice validation and Best Ways to Streamline this Process

Invoice validation maintains financial accuracy & compliance. Explore the methods to streamline this process & seamless financial operations.

December 6, 2023
Finance & Accounting
Top 10 Invoice Management Best Practices for Small Businesses
Top 10 Invoice Management Best Practices for Small Businesses

Invoicing can be a breeze for small businesses! Learn how to manage efficient invoices, ensure timely payments, and stay tax-compliant in this guide.

November 24, 2023
Finance & Accounting
7 Payroll Compliance Mistakes and Best Practices to Avoid Them
7 Payroll Compliance Mistakes and Best Practices to Avoid Them

Payroll compliance mistakes result in financial penalties, employee dissatisfaction etc. Know about mistakes and best practices for an error-free payroll.

November 23, 2023
Payroll Processing
What is the Accounts Receivable Turnover Ratio? Formula & Examples
What is the Accounts Receivable Turnover Ratio? Formula & Examples

Receiving payments on time is crucial for financial health. Learn how the accounts receivable turnover ratio is calculated and utilized.

November 23, 2023
Finance & Accounting
What is Financial Risk Management? Strategies to Protect Your Business
What is Financial Risk Management? Strategies to Protect Your Business

A financial risk can jeopardize your business stability. Explore effective strategies for mitigation in our latest blog.

November 23, 2023
Finance & Accounting
What is Trial Balance in Accounting: A Comprehensive Guide on Creation & Analysis
What is Trial Balance in Accounting: A Comprehensive Guide on Creation & Analysis

A trial balance serves as a vital tool in accounting by providing an overview of financial health. Explore the best ways to create and analyze it here.

November 22, 2023
Finance & Accounting
How to Make a Balance Sheet for Your Business? 8 Expert Tips
How to Make a Balance Sheet for Your Business? 8 Expert Tips

A balance sheet is your financial compass, and we've got the ultimate guide to create one. Dive into "How to Make a Balance Sheet" now!

November 22, 2023
Finance & Accounting
Balance Sheet vs. Income Statement: Learn Key Comparisons and Usage
Balance Sheet vs. Income Statement: Learn Key Comparisons and Usage

Balance sheet and income statement are two vital financial tools. Learn their differences and when to use each for better financial decision-making.

November 22, 2023
Finance & Accounting

Other Finance & Accounting Related Services

Other Services We Provide

Other Industries We Serve

Enquiry With Us
Enquire with Us

Enquire with us

Fill out this form to get in touch with our expert team.

Oops! Something went wrong while submitting the form.