As this current recession seems to deepen, many personal households are turning to cash budgeting as a means to survive. Watching and accounting, not only for what is spent but for what and when it can be spent in the future, helps these households better understand their current spending habits as well as determine how much they can leverage on future spending should they be able to access the capital markets (loans).
This same thinking can help small businesses survive this current economic downturn as well.
Most households get paid twice a month or every two weeks but face random expenditures; e.g. their mortgage payment is due on the 5th of the month, car payments due on the 21st of the month, credit card bills on the 15th and the 28th of the month and so on and so on. Creating a cash budget can help align these cash inflows (pay checks) with cash outflows (bills). Not only will this help these consumers match inflows with out flows but can also help them better understand their disposable income (income left over) for additional items like entertainment, vacations or even larger future purchases to include taking on additional debt.
In business, business owners face many of the same challenges but also face the challenge of being unsure of when payments will actually materialize. Businesses do not get paid on a set schedule like individual households but face sporadic payments from if and when customers walk into the store or visit their online website or from when a customer may or may not pay an invoice.
A cash budget not only will help the business owner better align their sporadic cash inflows with their set payment schedules but can also help better understand and manage when and how they are paid - think about the terms you allow your customers to pay you; e.g. when you batch and collect your credit card receipts or the rates and terms you provide customers via accounts receivable or even if you need to take debt for seasonal expenses.
According to Anwsers.com; Budget for cash planning and control that presents expected cash inflow and outflow for a designated time period. The cash budget helps management keep cash balances in reasonable relationship to its needs. It aids in avoiding idle cash and possible cash shortages. The cash budget typically consists of four major sections: (1) receipts section, which is the beginning cash balance, cash collections from customers, and other receipts; (2) disbursement section comprised of all cash payments made by purpose; (3) cash surplus or deficit section showing the difference between cash receipts and cash payments; and (4) financing section providing a detailed account of the borrowings and repayments expected during the period.
Further, what if you are losing customers to competitors because you are not offering credit but demanding immediate payment. A cash budget, according to investopedia; .is extremely important, especially for small businesses because it allows a company to determine how much credit can be extended to customers before they begin to have liquidity problems.
While I will go through all the detail here in creating a cash budget as it would take many chapters to try to explain fully - there are many resources on the web or in print that provide plenty of details in the creation and development of these great tools. (a small list of resources will be provided at the end of this article.)
The bottom line of a cash budget is to simply watch and manage the flow of revenue in and out of the business. Take for example; you have to pay a supplier in 30 days after receipt of its goods. In those 30 days, you have re-sold those goods (either as is or by adding value to them) and your customers requests 60 days to pay you. As you can see, you will not have the funds in time to pay your suppliers; who in turn will not be very happy and may not work with you in the future as well as can force you to close your business.
I use a cash budget in both my personal life and business. For my business, if I anticipate future spending like new software, hardware applications or even if I plan on future hiring, I understand if I have the cash to make that new expenditure while still meeting my current obligations or, if not, understand how I can manage for the expense and when I can afford to do so.
Some resources to help you understand and create your own cash budget: