Budgets & Cash Flow Projections

Should you spend time on preparing Budgets of Cash Flow Forecasts. Is one better than the other?

At the very least you should prepare a budget for Sales. Set your target per month and even per type of product per month. If you have good credit control and everything runs smoothly cash flow will not become an issue and cash flow projections will not be essential.

Where a cash flow projection could be very useful is where you have a low point in the year, a seaonal downturn that always happens, you can plan ahead to ensure you can meet all your bills rather than struggle for cash. For example avoid large cash outflows in your leanist sales months.

Budgets are your estimates for Sales & Overheads. These can be based on previous years historical data of expenditure combined with a knowledge of what increases you will have in the current year.

Cash Flow Projections measure when cash actually arrives and when cash is paid out (cash includes cheques not just pound notes). The inflows and outflows of cash can be based, for example, on your budget predictions for sales. For Sales in January, 80% of the cash may arrive in March and the remaining 20% in April. An overhead may be invoiced to you in May but you may not pay it until July or later. The overhead will be charged to the May Profit & Loss A/c, but the cash wont arrive until July.

To further complicate matters, your budget figures will be excluding VAT, your cash flow will include VAT. Remember Profit is not a cash figure. Profit is the difference between Sales and Costs, when you get paid, you get cash. You can be profitable but still have no cash!

On a day to day basis, knowing the cash available to you right now is more important as cash pays the bills. A budget lets you measure how you are performing and whether or not you are on target. This will allow you to predict in the future if will continue to generate enough cash to pay the bills.

Most Accounting Software has the facility to enter budget figures. The amount of detail you want to put in is up to you, but it will take time. At a minimum the most important figures if you want to reduce input time is your sales and cost of sales figures.

Most accounting software does not predict cash flow. I have created a spreadsheet, while not a cash flow projection spreadsheet, it will show you exactly how much cash you have right now at this very minute to spend. You can find it at www.help4accounts.com in the download section.

Always have some form of budget and always know how much cash you have and you may continue to stay in business. Lose track of your cash, or not know if you will make money and you will struggle.