How to Create and Use a Cash Flow Budget

Having sufficient cash on hand is vital to any business, large or small. Without cash, the business would essentially cease to operate. It is important to have a budget to plan out income and expenses but it is equally, if not more, important to have a budget to plan your cash flow.

A Cash Flow Budget is simply a way for you to predict how much cash that you will have on hand at any given time, thus knowing ahead of time if you will be able to meet obligations, such as payroll. You will also be able to plan ahead and know when you should make large purchases, such as purchasing a new piece of equipment or hire a new employee. Based on your cash flow budget, you will be able to see exactly if (and when) you will be short on cash and that will help you decide if you need to take out a short term loan or draw on your line of credit.

How to Create a Cash Flow Budget

Creating a cash flow budget is very straightforward. All cash flow budgets are for a specific period of time (month, quarter, or year) and will start with the amount of cash that you have on hand on the first day of the time period that you choose. Then, you will list all of the ways that you expect to receive cash, called Sources of Cash, and then all of the ways that you expect to pay out cash, called Uses of Cash.

It is important to note that since this is a cash flow budget, only include sources and uses of cash when you plan to actually get paid in cash or have to pay out cash. The reason this is important is, for instance, if you are on the accrual-basis method for accounting you would record a sale when the sale was made, not necessarily when the payment was given to you. In this case you would only include in your cash budget when the payment was given to you, not when the sale was made.

Let’s look at an example for the ABC Company. They are creating a cash flow budget for the entire month of April 2017, starting April 1st, 2017, and want to forecast cash by week. They know that at the end of the day on March 31, 2017 they had $8,500 in cash. They also planned out when they expected to receive cash and have to pay out cash.

		WEEK 1	WEEK 2	WEEK 3	WEEK 4
BEGINNING CASH		$8,500	$7,500	$8,200	-$2,300
SOURCES OF CASH
Cash Sales		$4,000	$8,000	$2,500	$4,750
A/R Collected		$1,500	$2,250	$4,000	$2,750
USES OF CASH
Payroll		-$3,500	-$3,500	-$3,500	-$3,500
Utilities			-$2,500
Materials Purchase		-$1,750	-$2,300	-$3,750	-$2,000
Administrative Overhead		-$1,250	-$1,250	-$1,250	-$1,250
Dividend Payments				-$6,000
NET CASH POSITION		$7,500	$8,200	-$2,300	-$1,550

How to Use a Cash Flow Budget

As you can see from the example above, the company started with $8,500 and listed what they expect to receive in cash for Week 1 from sales made with cash and collections on Accounts Receivable. They then listed out what they expected to spend cash on for Week 1. By taking the beginning cash balance, adding sources of cash and subtracting uses of cash the company knows that they expect to have $7,500 at the end of Week 1 ($8,500 + $4,000 + $1,500 - $3,500 -$7,750 -$1,250 = $7,500). This ending balance, or net cash position, at the end of week 1 is then the starting balance for Week 2.

Knowing how much cash the company expects to have at the end of each week can help the company plan ahead. For example, in the Cash Flow Budget above the company is not going to have enough cash to make it to the end of Week 3. The company now knows ahead of time this is going to happen so it has time to take appropriate measures. The company knows it could either draw on their line of credit or they could possibly defer the large dividend payout to another time period when they would have sufficient cash on hand.

Another benefit of a Cash Flow Budget is being able to predict your cash position using different scenarios by creating a Cash Flow Budget for “Best Case” and “Worst Case” scenarios. In the example above, the company budgeted that in Week 1 they will make $4,000 in cash sales. If they created a “Best Case” budget, they could see what their cash would look like if they made $5,000 in sales. If they created a “Worst Case” budget, they could see what their cash would look like if they made only $3,000 in sales. This could assist management in understanding the minimum requirements needed to meet obligations and then be able to plan for the worst case scenario.

Cash is certainly king in business, especially for small businesses. By using a Cash Flow Budget you will be able to plan ahead and take appropriate measures to ensure that all obligations will be covered.