How to Create a Cash Flow Budget in 7 Steps

Cash Flow Budget January 21, 2021

Chloe Henderson

Writer

There is a constant flow of money going in and out of a business, regardless if they are a traditional or e-commerce company. In order to determine how much revenue is needed to sustain operations, companies must understand their cash flow.

With a cash flow budget, companies can outline their cash inflows and outflows to ensure there are enough funds on-hand to meet financial obligations.

What is a Cash Flow Budget?

A cash flow budget estimates a business's inflow and outflow of funds over a specific period. The timeframe can vary from weekly or quarterly to even a full fiscal year. An accurate budget shows whether or not the company has sufficient funds to continue operations and invest in new ventures.

By providing insight into cash needs, businesses can use their budget to improve their expense management. It also supports data-based decisions on cash allocation to maximize the use of resources.

A cash flow budget can apply to any business operation that requires funding to execute. For example, a company can run a cash flow budget to determine if they need a loan to supplement an expansion effort in the distant future. They can also generate another short-term budget to measure the funds available for restocking products.

The ultimate goal of a cash flow budget is to project a business's financial stability so they can generate more cash than they give out.

7 Steps to Create a Cash Flow Budget

Every business needs to create a cash flow budget to gauge its financial performance and health. To start, companies should-

1. Utilize Software

Some businesses still use spreadsheets to do manual calculations and generate cash flow statements. However, this can result in human errors, such as miscalculations and erroneous data entries.

Instead, companies should utilize budgeting software that automatically collects financial data to generate an up-to-date cash flow statement. This makes it easy for the accountants to analyze the data and create an accurate budget.

2. Set a Timeframe

Typically, companies create cash flow budgets that range from six months to a year into the future. Depending on the timeframe, employees must gather relevant financial information from all management systems.

It is also worth noting that cash flow budgets lose their accuracy as the timeframe elongates. In other words, a budget for the next month will be more accurate than a budget for the following year. Therefore, businesses should begin working with a weekly or biweekly timeframe until they establish a reliable budgeting method.

3. Create a Sales Forecast

It is vital to identify revenue sources before creating a budget. For many businesses, selling goods and services is their primary source of income. Unfortunately, this also means that revenue can fluctuate significantly depending on customer demand.

In order to map out future sales, businesses must forecast demand based on historical data and market trends. This process is time-consuming and expensive when performed manually, as it requires expertise in both finance and statistics.

Demand forecasting software uses machine learning technology to collect sales data and detect demand trends so companies can predict future sales.

4. Predict Cash Inflows

Sales forecast reports enable management to estimate upcoming cash inflow. However, companies need to consider their payment term agreements and methods when anticipating cash inflow.

Businesses immediately receive profits from customers that pay with physical cash, whereas credit card payments may not be fulfilled until the end of the month. Some companies also offer payment plans so customers can make small installments over an extended period rather than paying in full up-front. Therefore, a sale reported in January may not actually be paid off until March.

These types of intricacies must be documented as they can create discrepancies when comparing sales and cash flow reports.

5. Estimate Cash Outflows

Cash outflows include any financial obligations a business must meet to sustain operations, as well as any variable expenses. Management should start by outlining routine costs, including-

Payroll

Rent

Utilities

Loan payments

Insurance

Then, managers should project additional needs, such as-

Marketing costs

Maintenance

New equipment

Onboarding hires

Additional purchases

Office Supplies

Procurement

Owner withdrawals

Building repairs

These expenses must be allocated in the right month, which often varies depending on the payment terms.

6. Calculate the Ending Cash Balance

Finally, managers can begin making calculations. First, the inflows should be calculated by month, followed by the outflows. The difference between these two values shows the monthly cash balance, or what cash is left. However, this does not necessarily represent the profit as it may be used to supplement anything missed in the outflow projections.

When finalizing the cash report, managers must also consider-

Bank account balance

Petty cash

Other merchant accounts

7. Establish a Minimum Cash Flow Balance

Businesses should already have a rough idea of how much money they need each month to continue operations. By establishing a minimum cash flow balance, companies can reach the target without worrying about creating a deficit.