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Maintain Company Health with Cash Budgeting

Simply put, cash budgeting is estimating the cash flow a business will have over a period of time. It doesn't necessarily have to be on a yearly basis, it can be over the course of a week, month, or quarter as well.

The main purpose of this budget is to assess whether the business will have enough cash flow to continue operations over a given time frame. It will highlight any potential cash needs and also any times where a higher cash flow is expected to help businesses allocate their funds efficiently.

How Does It Work?

Using a combination of sales reports, accounts payable and accounts receivable reports, and forecasts, a business can create a cash budget. When the budget is created, it will show a business if it will have enough funds to continue operations, but if a cash budget comes up short, it will alert the business that they will have to make adjustments in cutting back in areas, pushing more sales, or taking on more debt to maintain operations.

Short-Term & Long-Term Cash Budgeting

Cash budgets can be created in both short and long-term periods. A short-term cash budget would show what cash is needed over the upcoming weeks or months, whereas the long-term would cover a time span of a year or multiple years into the future.

Short-term cash budgets will take items like utility bills, rent, payroll, cost of goods sold, and other operating expenses into consideration. A long-term cash budget will include items like quarterly and annual tax payments, large projects, and long-term investments. The long-term budgets also typically require more planning and reporting to be accurately put together.

Creating a Cash Budget

In order to create a useful cash budget, reliable forecasts of the business's cash inflows and outflows must be established. Some of these flows are predictable, like payroll, rent, and utility bills. Some items will fluctuate throughout the year, like sales figures. Once the figures are compiled, it will be possible to create the cash budget.

Creating cash budget figures can look something like this:

Expected Income (Sales, AR, Previous Period Remaining Cash, etc.) - Expected Expenses (COGS, Operating Expenses, etc.)

Strong reporting and record-keeping are the foundation for accurate cash budgeting. Working with an outsourced accounting services provider will help businesses keep their books straight and organized to make creating a cash budget an easy task. Reach out to today to learn more about how our client-based accounting services can help be prepared for the future and growth.

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