Cash Flow - why do I need a budget?

Last week I talked about “What is Cash Flow?”  If you missed that post, you can review it HERE.  This week’s post is “Cash Flow - why do I need a budget?”  Good cash flow management involves more than just taking care of the cash you have. You need to look at what is going to be coming in, too.  In order to do that you need a good cash flow projection built from for 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. You obviously can’t spend it before it comes in, but you need to know what is coming up so you can be prepared. You also can’t predict the future, so you may have some surprises occasionally. But you want to keep the surprises to a minimum. 

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

To start with, you budget will tell you how much money you expect to come in and go out each month.  This is important because you need to know what your cash needs are and what you are expecting to come in to pay for them.  Your well prepared budget also tells you how much money you have after you have paid your bills and obligations.  Is the 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 instance, if you always collect from your customers immediately when you complete your work, you don’t have to account for a delay in receiving your funds from your customers.  That will make is so you don’t have to adjust the cash flow section of your budget to allow for the timing of receiving your revenue. 

If you bill your customers, you will have to allow for a delay in your cash coming in.  That will change the timing of your cash.  You will have to allow for the time it takes for the money to come in.

How you pay for your materials 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 funding to do that.  When combined with billing your customers, this could present a funding challenge to your business.

Preparing a budget will help start up companies see what kind of money they are going to have to invest as they are building their business.  They need to remember to be generous with their expense projections and stingy with their revenue projections.  They need to plan on it taking longer to get the revenue going and costing more than they think it will when preparing that start up budget.  A budget will give them a measuring stick to see how their actual performance compares to what they budgeted.  From there they will be able to tell if their money is on track to last as their business grows or if they need to be smartly thrifty about their spending (buying things that will get customers and sales).

Actually 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.

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 important insurance payment.  Be smart with your money and save so you have enough money to make that payment when it is 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.

If you know someone this post will help, please share it with them!  Then scroll down to the comments section and leave me a comment on this post.  If you aren’t already a subscriber, sign up to receive notification emails and information on other promotions!  I will be teaching my Cash Flow Workshop soon, sign up so you don’t miss it!

God Bless your week!