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Budgeting Essentials Blog

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Budgeting - Keep your monthly Cash Flow Positive

Last week I talked about Be conservative with your estimates. If you missed that post, you can review it HERE.  This week’s topic is keep your monthly cash flow positive. Planning your cash flow may seem to be something that you can’t do. But with a well prepared budget, you can avoid many cash flow issues before they happen. 


Having enough cash available for your business is critical to surviving. The Bureau of Labor Statistics publishes a table of survival rates for new businesses.  Those statistics show that over the last twenty years, about 50% of new businesses have failed within 5 years of beginning and by year 10, that number has grown to about 65%.  See the table HERE.  Employees and vendors like to be paid on time.  You want to be in the 50% that stay in business.  But how do you know when your cash is going to be low before it happens so you can do something about it? 

The first thing you need to do to help you predict your cash flow is to put together a well thought out budget.  A well thought out budget will help you see when your expected cash is going to be negative.  When you are developing your budget, there are a number of factors that can affect your cash that you can adjust so that you are able to avoid having your cash go negative.  An item that can have a large effect on your cash flow is purchasing capital equipment.  Capital purchases are made up of large ticket items that don’t affect your P&L directly when you purchase them.  An example would be a landscaping company purchasing a $5,000 mower.  You can’t put that expense on your P&L, but you have to lay the cash out for it.

Equipment wears out as you use it, so one of the best things you can do is fund a savings account to use to replace your capital items.  When it comes time to replace them, you already have the money put away to make the purchase.  Put this item on your budget as a deduction below your profit line, (in the same area you put principal payments), and don’t use this money for anything but capital replacements.  That also means you don’t count it in your operating cash.  You don’t want to include this money in your cash flow because it is not available to be spent for that purpose.  This will also put more money in your pocket as you avoid paying interest on credit cards or loans to make those purchases. 

Your budget is also a great tool to use to help you plan your discretionary expenses.  A discretionary expense could be new uniforms for your staff or mugs that you give away as a perk to your customers.  These are things that you have more control over the timing of the purchase.  Use the cash flow section of your budget to help you choose a time that is not going to make your cash tight so you can’t purchase materials for a job or pay your staff. 

Another way that your budget will help you with your cash flow is by allowing you to see months when drumming up extra business could help increase your cash flow.  Remember, these extra efforts don’t necessarily have to be right before a projected shortfall, especially if those shortfalls happen to fall right in the middle of your busiest season.  If you know that tight month is projected several months out, you have time to figure out when that good time for extra business is without having to put in even more time when you are already busy.  This is a great reason to get your budget done a couple months before the new year comes so you have time to react if January (or whatever your first month is) ends up being the month you need to do something about.

Your budget can also help you do what-if analysis to see the effect that price increases or expense changes have on your cash flow.  If you know that you have a projected cash shortage coming up, sometimes the answer to that is to do a pricing adjustment to bring in more cash instead of trying to increase sales.  The sooner you can put that price increase into effect, the smaller it needs to be to solve the issue.  A what-if projection with your budget will allow you to see how big that increase needs to be and when you need to put it into effect.  You can also do a what-if analysis on expense increases like wages.  This will allow you to see the cash flow effect based on the timing and the size of the increase.

A well prepared budget is a great tool to use to help you keep your monthly cash flow positive.  It helps you plan many aspects of your business and gives you time to proactively deal with potential issues before they become emergencies that take you away from serving your customers.


© 2018 Dan Heiland 2018 Kat Heil, LLC

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