Cash is the gasoline that makes your business run. Cash flow can be defined as the way money moves into and out of your business; it is the difference between just being able to open a business and being able to stay in business. A cash flow analysis is a method of checking up on your firm’s financial health. It is the study of the movement of cash through your business, called a cash budget, to determine patterns of how you take in and pay out money. The goal is to maintain sufficient cash for firm operations from month to month. This type of cash flow analysis is called developing the cash budget.
Time Required: 3 hours
- This type of cash flow analysis is called cash budgeting preparation and analysis. It is part of your firm's short-term financial forecasting plan. Determine the amount of cash that will flow into your firm during the month. If you are just starting your business, you should include the beginning balance in cash that you want to have available every month. There would also be the amount of sales you have during the first month. Sales would include both cash sales and sales that you make to your customers who pay on credit. Here's an example you can follow to develop your Schedule of Cash Receipts (Sales Receipts).
- Determine the amount of cash that will flow out of your firm during the month. You will have expenses. You will probably have to buy office supplies. Other monthly expenses may include advertising, vehicle expenses, payroll expenses, just to name a few. You will have some quarterly expenses, such as taxes. You may have expenses that just occur occasionally, like purchases of computer equipment, vehicles, or other larger expenses. Here is an example of a Schedule of Cash Payments that is the second step of the cash budget.
- You want the cash that will flow into your firm (Step 1) to be greater than the cash that will flow out of your firm (Step 2). This means that your monthly cash inflow needs to be greater than your monthly cash outflow so you will have sufficient cash to operate your firm. Here's a blank worksheet you can use to calculate your cash inflow or cash receipts and another blank worksheetyou can use to calculate your cash payments.
- Your ending balance for the first month becomes the beginning balance for the second month. You do the same type of analysis. Each month, you may have to add more items to your cash flow analysis as your business grows. You need to decide what the minimum ending cash balance is that you find acceptable for your firm and aim toward that figure each month.
- If your cash flow turns negative for any one month, you will have to borrow money for that month from family or friends, investors, or from a bank or other financial institutions. Then, if your cash flow is positive the next month, you can repay that loan.
- Keep on doing this each month for your forecasting period. Try to keep your borrowing to a minimum and your cash inflow greater than your outflows. Remember that this cash budget is a financial forecasting document but try to follow it as closely as possible. Here is an example of a completed Cash Budget, based on the schedules already completed, that you can look at. Here is a blank worksheet you can use for your own company.
- Take a look at this article. It shows you how to use the cash budget as a part of a comprehensive financial forecasting plan.
- This worksheet helps you develop the first part of your cash budget, the Schedule of Cash Receipts. This blank worksheet gives you space to develop your own Schedule of Cash Receipts.
- This example of the Schedule of Cash Payments shows you how to develop the schedule for your company. Here is the blank worksheet you can use to develop a Statement of Cash Payments for your company.
- Here is an example of a cash budget based on the schedules developed previously. Here is a blank worksheet you can use for your own company.
- Read and follow these 6 Tips for Maintaining a Healthy Cash Flow and the tips in How to Increase your Cash Flow.
What You Need
- Your business computer
- The computerized accounting program you use
- All your sales receipts and expenses
- How much cash you want to have on hand at all times
- Your initial beginning cash balance