Budgeting Essentials

Helping you master the practical essentials of Budgeting, Cash Flow, Accounting and Debt Relief.
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Cash Flow - Entrepreneurs... Get THIS

Good cash flow management involves more than just taking care of the cash you have. You need to look at what cash is going to be coming in, too. In order to do this you need a good cash flow projection built from your budget. Learn more in this week’s blog.

 When you wait until your money is already in the bank to decide what to do with it, you will run into trouble.  Why?  You obviously can’t spend money before it comes in, but you need to know how much money is coming inand what obligations you owe so you can be prepared. You also can’t predict the future, so you may have some surprises occasionally. But you want to keep financial surprises to a minimum. 

The best way to keep financial surprises minimal is by doing projections on your cash so that you know when and how you can spend what money comes in. In order to do accurate cash projections, you are going to need a well prepared budget.  Now a budget has other benefits besides doing cash projections (see that post HERE), but today I am focusing on how a budget helps you with your cash flow projections. 

To start with, your budget will tell you how much money is expected to come in and go out each month.  This is important because you need to know what your cash needs are and how much money is coming in to pay the bills.  A well prepared budget also tells you how much money you have after you have paid your bills and obligations.  Is a certain month supposed to be a tight cash month, or a month that has more cash available?  Your budget can tell you that before you do any cash flow projections.

Depending upon how complex your business is, your budget may be enough to give you good information on your cash flow.  For example, if you always collect from your customers immediately upon completion of work, you don’t have to account for a delay in receiving your funds from your customers.  This means you don’t have to adjust the cash flow section of your budget to allow for the timing of receivables. 

Alternatively, if you bill your customers, you will have to allow for a delay in receivables coming in.  This changes the timing of your cash.  That is the time it takes for the money to be received by your company.

How the business pays for materials and supplies will also have an effect on the timing of your cash.  If you have to pay for your materials up front, you will need to make sure you have enough funds on hand for that.  Upfront purchase payments, combined with billing your customers, could present a funding challenge to your business.

Preparing a budget helps start up companies understand the upfront investment necessary to build a business.  If this describes you, remember to be generous with your expense projections and stingy with your revenue projections.  You need to plan on it taking longer to get the revenue going and costing more than you think it will to pay for start up costs.  A budget will give you a measuring stick to see how your actual business performs against what you budgeted.  From there you will be able to tell if your money is on track to last as your business grows or if you need to be thrifty about spending (buying things that will get customers and sales).

Did you know that managing your money using your budget involves more than deciding which bills to pay when you get some money in?  You don’t want to be distracted by urgent items (the ones that are in front of you screaming for attention) when you should be focusing on important things (items that are coming up that you need to make sure your pay.  There is a big difference between the two.  Some business owners get confused by urgent vs. important.  But not you.  You are savvy.  You learn about Cash Flow situations.

A good example of this is an annual insurance payment.  If you are using your budget to plan how you use your cash, you will be putting aside money every month to pay the bill when it comes due annually.  Otherwise, you will be tempted to finance the payment with your insurance broker, increasing your costs and their profit.  That will happen if you are just paying the bills as they come in.  The urgent bills will overshadow the more important annual insurance payment.  Be smart with your money and save so you have enough money to make important payments when they come due.

Your budget will help you see what is coming up from both a revenue and an expense standpoint.  You will be able to see your seasonal patterns in revenue and your periodic expenses.  The budget will also show you when you have tight cash months and bountiful cash months.  Manage the bountiful ones so that you have enough cash in the tight ones.  A budget will help you do that.

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God Bless your week!

 

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© 2019 Dan Heiland 2019 Kat Heil, LLC

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