How to Create a Simple Cash Flow Budget

By Team Zeller

2.08.2021 Finances

How to Create a Simple Cash Flow Budget

Creating a cash flow forecast or budget will help your business to run more efficiently.

Proper cash flow management is critical to business success. Unfortunately, many businesses struggle with common cash flow issues that make it difficult to operate — let alone grow. The first step towards solving a cash flow problem is creating a cash flow forecast.

A cash flow forecast or budget is an estimate of your business's income and expenses over a specified period of time. It’s one of the most important financial management tools you will use, as it will assist you to:

  • meet your day-to-day financial commitments;
  • plan for likely shortages in your finances (for example, knowing when your restaurant may be quieter than normal and having enough cash to get through that period);
  • meet benchmarks, helping you to improve your cash flow performance over time;
  • make calculated decisions about future spending for an expansion of your business; and
  • demonstrate you have a good handle of your cash flow when seeking finance.

Keep reading to discover some of the key advantages you will gain by taking the time to create a cash flow budget, as well as the three important steps you’ll need to take to get there.

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Advantages of a cash flow forecast

Aside from the obvious —  avoiding financial shortages and capitalising on surpluses —  having a cash flow budget can benefit your business in three major ways.

1. Get out of debt faster

Cash flow forecasts will identify when you’ll have the most (and least) cash flowing into your business, and help you plan for when debt repayments and bills are due — ensuring you are not put further into debt.

2. Stick to financial restrictions

Some debt lenders require businesses to maintain certain levels of cash to make sure they can reasonably afford their regular repayments. Forecasting will help your business identify any potential problems that may inhibit you from adhering to these restrictions, or suffering greater financial strain.

3. Predict growth

Wondering when the best time to plan for growth of your business is? Look at your cash flow forecast.

Since a cash flow forecast indicates when you’ll experience cash surpluses, it is a crucial tool when it comes time to grow your business.  Any time you are considering investments or small business loans, purchasing new equipment, or even hiring more staff, you should consult your forecast. It will also allow you to see a projection of the impact making that growth decision will have. For example, if you were to hire a new employee you can see how the expense of their salary and hiring costs will impact your future cash flow.

It's also important to consider worst-case scenarios when putting together your forecast, to see if there are ways you can enhance the capacity of your business to deal with tough times — such as unforeseen low periods in sales. Having contingency plans in place for when, for example, a lockdown is imposed will help you feel more confident in the future of your business.

How to create a cash flow budget in three steps

There are three things you can do right now to get a handle on your cash flow projections. However, before you begin this process, it’s important to recognise a cash flow budget is based on estimations and assumptions.

Before putting pen to paper, prepare a list of assumptions based on your past performance as well as future projections. You likely want to include:

  • likely supply price increases
  • a sales growth estimate
  • how seasonality impacts cash flow
  • a provision for business cost inflation
  • pay increases for internal salary and wages

Then you can begin to work out your business's cash flow forecast for your chosen period.

Step 1: Estimate your likely weekly or monthly sales

Use your sales history from previous years to get an idea of how much you make from sales for the week or month. To ensure you estimate is as robust as possible, you should also factor in:

  • seasonal sale trends
  • one-off events that might increase income
  • current market trends and conditions
  • future plans for your business, such as launching a new product or service
  • how business competitors may affect sales (for example, if another salon has just opened down the road, you may want to adjust your figures accordingly)

If your business is a new operation, look for relevant consumer surveys, track the performance of similar operations, and look for industry expert advice to estimate your sale projections.

Step 2: Estimate when you will receive payments

Unless your business operates as "cash only", customer payments won’t always be received at the time of sale.

It's important to factor in the time it may take for funds to settle in your account, as this has an impact on cash flow. You can't put the money your business generates to work until the funds hit your bank account. Take a close look at your merchant statement or call your merchant services provider directly to determine how long it takes for funds to clear. Or, if you're a new business, use industry benchmarks to help with this.

At Zeller, we recognise fast access to your funds is critical for business success. That's why, for merchants accepting payments through Zeller Terminal, funds are settled the next business day.

If you invoice customers, you need to work out how long it typically takes a customer to pay. For example, if you invoice a total of $50,000 a month, you might estimate that 80% of total payments are paid during the month they were billed, while 10% are paid the month later and 10% are made two months later.

Step 3: Estimate your likely costs

Just as you have estimated your weekly or monthly sales revenue, you will need to consider your outgoing cash. This includes both fixed costs (such as rent, bills, and salaries) and variable costs (that depend on sales volume, such as purchasing additional stock during busier periods). Costs to keep in mind are:

  • wages and salaries
  • rent
  • investments
  • inventory and office supplies
  • bank charges
  • debt payments

To do this, go through historical payment records and make sure to note down when regular payments, including fees on payments, are due.

Use your forecast to monitor business performance

By keeping track of your cash flow, you will be able to paint a good picture of how well your business is doing in the short term. If you compare your actual income and expenses to your forecast and discover that your business is over or under performing, you'll know it's time to investigate.

Has a competitor changed its strategy? Is there a new competitor in your market? Actively managing your business in this way empowers you to ask the right questions and, ultimately, make the right decisions.

Regularly comparing your actual financial position with your projected cash flow will give you an indication of where you stand within the market, and can help you make decisions that will ultimately have a positive outcome for your business.

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