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While most companies are focused on generating revenue it's important to remember that money doesn't only flow into a business, but out.

Creating a Cash Flow Budget

April 17, 2019
By Comerica Bank

While most companies are focused on generating revenue, and rightfully so, it's important to remember that money doesn't only flow into a business, but out. Profits are just one part of the equation, as businesses have monthly expenses and debt obligations they must meet. This means owners have to pay strict attention to their reserves to ensure they always have enough cash on hand. This is called cash flow budgeting, and it's an important process for any business.

How to create a cash flow budget

Cash flow budgeting is the practice of tracking all cash inflows and outflows. Inflows are your cash receipts: any accounts receivable expected within a certain time period, immediate payments made to a business or income from other services. Outflows refer to the fixed and variable costs that operations incur, including electricity and gas payments, insurance premiums, building rent, equipment fees and employee wages. Creating a cash flow budget is a matter of adding up your inflows and subtracting your outflows. What you're left with is the remaining cash balance you'll have on hand, or cash flow. If it's a positive number, great; if negative, there are issues.

Creating a cash flow budget for any given month is as easy as:

  • Using a basic spreadsheet application or software, like those available from Microsoft®️ or Google®️.

  • Tally up what you expect to receive from accounts payable, recurring revenue and carry-over surpluses.

  • Add together your expenses; estimate your variable expenses to the best you can, even overestimate slightly to leave wiggle room. 

What's left is your cash reserve, a sum from which you can draw for ad hoc costs, reinvestment in your business and other reasons. A cash flow statement is the document itself depicting your inflows and outflows. It's required for publicly traded companies to file such statements with regulatory authorities. While small businesses may not be required to provide statements, there are benefits to keeping records. For one, visualizing cash flow can help you to better manage it; also, potential investors will usually demand that level of insight into operations before extending financing.

Cash flow forecasting

The reason a cash flow budget is so critical is that profitability on paper doesn't always translate to cash on hand. For instance, if your clients typically pay a month or two after services were rendered (which is common), an apparent windfall from a large project may actually be leaving you in a lurch in the meantime when expected profits don't make up for bare-thin cash flow margins. Sometimes you might still be in a good place, but an emergency expense or natural disaster wrecks everything.

For these reasons, it's essential to use cash flow forecasting. This process is basically the same as crafting a short-term cash flow budget, but with cash flow forecasting you're looking ahead at months, quarters or years to come. 

Projecting cash flow variables ahead of time can help businesses better track and allocate assets, as well as protect their solvency and ability to meet obligations. For instance, adjusting cash flow expectations to account for upcoming seasonal changes could prevent a harsh winter and high energy costs from creating balance sheet problems. It's also a good idea to construct forecasts for when large debts or loans come to bear. If unexpectedly slow revenue or late payments should affect cash flow, the ability to make those debt payments could be threatened.

All told, cash flow budgeting is a must for businesses. It provides valuable insight into operations and financial management. Yet it can be a complex process with all the different factors that must be considered. If interested in improving your cash flow management, talk to Comerica Bank today about services and products that can assist.


This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice for your business.