Cash Budgeting for Your Small Business

A steady source of cash for the day-to-day running of a business is extremely crucial and the importance of cash budgeting cannot be emphasized enough. More so, if you have your own small or home business, where the overheads are significant and suppliers and other vendors demand cash-on-delivery (COD). This article explores why cash budgeting is important for small businesses and how to get an overview of in flow and out flow (positive and negative cash flow) of the cash.

Reasons for Cash Budgeting

Cash budgeting is extremely important as far as analyzing financial position of a business and creating PL accounts are considered. Listed below are some important reasons why cash budgeting is a sound business principle, irrespective of the size of the business:

  • Payment inflows (revenues) are not fixed, in that one cannot predict the exact, set time money will flow in.

  • Money is required to keep the business running on a day-to-day basis, whether for raw materials, or for administrative, personnel, etc expenses.

  • Maintaining a cash flow analysis, which is part of the budgeting exercise, will help the business owner manage finances better and provide for unforeseen emergencies.

The Cash Budgeting Process

A cash budget is further classified into four sections as below:

(a) Receipts in cash, including cash-in-hand and all cash receivables,
(b) Cash outflow, all payments made out by the business to various persons/entities,
(c) Section showing surplus cash or deficit-in-hand, and
(d) Account statements with full details of payments received and made.

Once you have a detailed idea of how cash is moving in and out of your business, you will be able to create a budget which will allow you to apportion liquid cash among various heads. For example, you can save some money, if you were in a position to offer credit facilities to your customers or vendors, i.e. give them a specific time when they would need to pay you money for goods and services provided, instead of paying cash for transactions upfront. Similarly, negotiating credit facilities with your suppliers will provide you some breathing space, when it comes to paying out money.

Another benefit of cash budgeting is that it allows you to forecast short and long-term expenses as well as provide opportunities for expansion or diversification in the business.

Managing Cash Budgeting

Where you are extending credit facilities, ensure you have a proven track-record of customers making timely payments and a contractual failsafe against potential defaults. Offer attractive cash discounts for those who opt to pay immediately instead of using the extended credit facility. Track your money and ensure you have sufficient cash reserves to make payments to suppliers on delivery or on specified due dates.

Do not overstock inventory and move long-term inventory by offering discount sales or other marketing tools. One thing which is important to know here is about choosing your cash budgeting platform wherein you will be performing your cash flow operations. Mostly, use computer spreadsheets and be open to innovative software and technology to apply necessary accounting modifications.

Keep the above information in mind and plan your cash budgeting effectively, this is one way to ensure the continued success and growth of your small or home business.