How To Prepare a Cash Budget Analysis for Your Business

A budget analysis is also known as cash flow analysis and is the summary of how money flows in and out of a business. This essential activity can influence whether you stay in business or close shop. In other words, the cash flow statement is what indicates your business’ financial health. The main objective of undertaking this analysis is to ensure your business has enough money to cover its operations month in and month out. 

Why It’s Important To Prepare A Budget For Your Business

Similar to how you need a map to provide directions on how to arrive at a destination, businesses need budget analysis to provide direction on the best financial decisions to make. Apart from that, it’s also important for planning ahead in terms of expenses and goal achievement. 

With a budget in place, businesses tend to be more conscious of available resources and allocate resources to expenses appropriately. In the long run, this will prevent wasting resources as this may lead to losses, debts, and eventually, an inevitable shutdown. 

Step-By-Step Process Of Creating A Cash Budget

Also known as cash budgeting preparation and analysis, this analysis is integral to your firm’s financial forecast in the short term. When conducting analysis, you would want to estimate the amount of money your firm will handle for the entire month. It’s important to include the starting balance; the amount of money available at the start of each month, the total sales for the month, including those sales made via credit/cash.

The next step is to estimate the amount of money that will flow out of the business for the month. In short, these are the firm’s expenses and they’ll include office supplies, payroll, transportation, advertising and the like.

There’s also taxes. These are quarterly expenses but you must account for them as well. Then there are those expenses that occur once in a while such as computer equipment or other capital purchases. 

The next step is to balance both categories but make sure the money flowing out of the business doesn’t exceed the money flowing into the business. If this happens, it means the business is making losses. You would want to make sure you have enough money to operate the business, otherwise you’ll have to borrow to bridge the financial gap.

Keep in mind that your closing balance for the first month will be the opening balance for the next month. Do the same analysis for this month, however, as the business grows, you’ll notice that new expenses will crop up. Add them to the expense category but you must set a minimum closing balance for the business and work towards that.

As mentioned earlier, your cash flow may come up negative. This means you may have to borrow money to ensure all business operations don’t grind to a halt pending when you can attain a positive cash flow.

Finally, follow the steps listed above every month. Also, borrowing may be inevitable in business but you want to maintain low debt levels. Furthermore, keep the cash inflow more than the outflow and remember that this is a financial forecast but do your best to follow it.

Tips To Follow When Preparing A Budget Analysis For Your Business

Preparing a budget analysis is an integral part of your business. Even the slightest mistake in preparing this document may cost the company a lot of resources. Therefore, you must pay attention to certain factors – most of all being the cash inflows and outflows. Follow these tips when creating this crucial document. 

• Make predictions – Remember, budget analysis is a forecast of how your business will perform over a certain period. This includes potential income and expenses. However, you must also factor in unexpected expenses that may shake your budget.

• Use visuals – Visuals such as charts and graphs will capture your attention as soon as you lay eyes on them. Also, they are a great way of representing a lot of data in a simple way.

• Go over your calculations – When money is involved, you want to dot all the I’s and cross all the T’s. This is why you must recheck your calculations to make sure everything adds up. You can also use an extra pair of eyes to catch errors you may have missed.

• Seek professional help – Finances can be a real headache, especially when dealing with huge numbers. Consider seeking advice from a finance professional.

• Get a loan if you need to. As mentioned earlier, your cash flow may come up negative. This means you’ll have to borrow money to ensure all business operations don’t grind to a halt. Later on, you can repay the loan once you have attained a positive cash flow.

Again, a budget provides guidance on the direction a business should take. The company budget must be flexible and updated often enough to align itself with the changing market. Finally, keep in mind that financial forecasting and budgeting must work together. For instance, both long term and short term forecasts should be used to come up with the final company budget.