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Creating and Using a Cash Flow Budget

Filed under Cash Flow. Fact checked on May 24, 2012.

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Preparing your cash flow budget will help you project cash inflows and outflows over a specific period of time. Learn how to create a sales forecast for your business with this invaluable budget.

This budget serves as a useful projection of your business's cash inflows and outflows over a certain period of time. A typical cash flow budget predicts the anticipated cash receipts and disbursements of a business on a month-to-month basis.

However, a cash flow budget could predict the cash inflows and outflows on a weekly or daily basis. Because of the uncertainty involved in the cash flow budget, trying to project too far into the future may prove to be less than worthwhile. At the same time, a cash flow budget that doesn't look far enough into the future will not predict future events early enough for you to take corrective action in your cash flow.

What a Cash Flow Budget Provides

A six-month cash flow budget minimizes the amount of uncertainty involved in the budget. It also predicts future events early enough for you to take corrective action. However, if you're applying for a loan, you may need to create a cash flow budget that extends for several years into the future, as part of the application process.

The primary purpose of using a cash flow budget is to predict your business's ability to take in more cash than it pays out. This will give you some indication of your business's ability to create the resources necessary for expansion, or its ability to support you, the business owner. The cash flow budget can also predict your business's cash flow gaps—periods when cash outflows exceed cash inflows when combined with your cash reserves. 

You can take cash flow management steps to ensure that the gaps are closed, or at least narrowed, when they are predicted early. These steps might include lowering your investment in accounts receivable or inventory, or looking to outside sources of cash, such as a short-term loan, to fill the cash flow gaps.

Preparing a cash flow budget involves four steps:

  1. preparing a sales forecast
  2. projecting your anticipated cash inflows
  3. projecting your anticipated cash outflows
  4. putting the projections together to come up with your cash flow bottom line
Tools to Use

Included among the Business Tools is a cash flow budget worksheet. The Excel template (version 4.0 or higher) can be used over and over again once you download it.

The worksheet is designed for projecting your cash flow for six months. We've formatted the worksheet and put in most of the cash inflow and outflow categories for you. All you have to do is put in your numbers and print it.

Once you've downloaded the worksheet, feel free to modify the worksheet to fit your own needs. 

Establishing a Sales Forecast

Any financial plan must begin with a forecast of sales for the business. The cash flow budget is no different—a sales forecast is the first step. Any forecast will include some uncertainty. 

Your sales forecast probably won't match your actual sales because of the many variables that ultimately affect the final amount. The economy, inflation, competitive influences and a whole range of other variables will affect your actual sales. No matter how much uncertainty you associate with these variables, a sales forecast is still required.

Tip

Using your business's previous year's sales amounts is an excellent starting point for your sales forecast. This should be adequate enough for beginning your cash flow budget. Using last year's sales amounts should provide you with enough insight to predict any seasonal fluctuations or trends when preparing this year's sales forecast.


The sales forecast is the first step in preparing a cash flow budget — an important step in predicting major cash problems, or hopefully, cash flow successes.


Example

John Divot owns a golf supply retail store. John will use last year's sales amounts to prepare his cash flow budget for the next six months. Here is the sales information from the first six months of last year:

January $18,000
February $18,500
March $20,500
April $28,900
May $32,300
June $36,600

John expects sales for this year to be 1 percent higher in the off season and 1.5 percent higher during the golf season; which begins in April. John forecasts his sales for the first six months of this year to be as follows:

January $18,180
February $18,685
March $20,705
April $29,333
May $32,785
June $37,150

Projecting Cash Inflows Illustrated

Projecting cash receipts for your cash flow budget involves recognizing the cash inflows from a sales forecast. If your business only accepts cash sales (lucky you!), then your projected cash receipts will equal the amount of sales predicted in the sales forecast.

Projecting cash receipts is a little more involved if your business extends credit to its customers and deals with accounts receivable. If this is the case, you must take into account the collection of accounts receivable and the timing effect that collection has on the projection of your cash receipts. 

Applying your accounts receivable collection pattern from the past to your sales forecast is the best way to predict your cash receipts from the collection of accounts receivable. To see how this is done, take a look at our case study.

A Case Study in Projecting Cash Receipts

Applying your accounts receivable collection pattern from the past to your sales forecast is the best way to predict your cash receipts from the collection of accounts receivable. The following example shows how to use your accounts receivable collection pattern to project future cash receipts:

Meet Lynn Vernon, a financial planning consultant to small businesses. Lynn receives 20 percent down when a consulting agreement is signed. The customer is billed for the remainder after the job is completed. 

Lynn's credit terms are Net 30 (the full amount due within 30 days). Relying on her experience with accounts receivable collections from the past, she assumes the following when projecting her cash receipts for her cash flow budget:

  • 70 percent of the accounts receivable are collected in the month following the completion of the consultation
  • 20 percent of the accounts receivable are collected in the second month following the consultation
  • 10 percent of the accounts receivable are collected in the third month following the consultation

Using her accounts receivable collection pattern and her sales forecast, Linn can now complete her cash receipts projection for the first six months of 2014. (Note: the actual sales for October, November, and December of 2013 were $30,000.)

Vernon Consulting Service
Cash Receipts Projection
  Jan.
2014
Feb.
2014
Mar.
2014
Apr.
2014
May
2014
June
2014
Forecasted Sales $30,000 $35,000 $40,000 $50,000 $40,000 $30,000
10% down 3,000 3,500 4,000 5,000 4,000 3,000
70% 1st month 18,900 18,900 22,050 25,200 31,500 25,200
20% 2nd month 5,400 5,400 5,400 6,300 7,200 9,000
10% 3rd month 2,700 2,700 2,700 2,700 3,150 3,600
Total receipts $30,000 $30,500 $34,150 $39,200 $45,850 $40,800

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