Creating a cash budget. A guide for Australian businesses.
Taking time out to create a cash budget is time well spent. Tracking your cash flow and business budget month by month may help you plan ahead and take advantage of opportunities. Best of all, it's really not complicated. Just follow the steps below.
A cash budget is an estimation of your cash flow over a given period, such as a month, quarter, or year. Its key purpose is to establish your cash position, which predicts your business's ability to take in more cash in income than it pays out in expenses.
An annual cash budget, for example, can factor in any seasonal fluctuations that affect your business, giving you a more accurate overall picture of your finances. A long-term cash budget is an important indicator of long-term liquidity.
Creating cash budgets and calculating your cash position are relatively simple and can be done in three steps.
Your cash flow budget tracks all the cash inflows (receipts) and cash outflows (payments) going through your business.
Your inflow is the grand total of your customer sales, other business income and receipts.
Your outflow is the total sum of all costs incurred in running your business, including all the payments you make:
Review your cash position at least once a month, and make sure you schedule the task in your diary, so it isn’t forgotten. This should ensure you always have an up-to-date sense of your cash flow.
Once you know your cash inflows and outflows, you should be able to work out your cash position and the beginning cash balance you'll be starting each accounting period with.
Things you may wish to consider based on the outcome of your cash position:
Keeping on top of your cash budgets can provide you with valuable insights into the financial health of your business. This is particularly important if it’s subject to seasonal volatility of both income and fluctuating prices for raw materials.
Your cash budget can help you decide the best time to invest in growth versus carefully managing costs to maintain liquidity – so it’s an important strategic tool.
Having a business bank account that's separate from your personal finances will help simplify your cash budget calculations each month, by keeping business and personal expenses well apart. A clearer view of your business inflows and outflows also helps you track performance and plan for tax time.
With Westpac for example, you can choose between a $0 monthly fee business account (Business One) and an added value business account (Business One Plus) that gives you access to exclusive discounts on popular business products and services. Unlimited electronic transactions are included with both accounts, and to simplify financial management and bookkeeping you can connect them to accounting software such as MYOB and Xero.
To sum up
There's no denying that businesses need a healthy cash flow to thrive and grow. Sitting down regularly to produce an up-to-date cash budget could help avoid any unwelcome surprises and keep you in control of your finances.
This information does not take into account your personal circumstances and is general. It is an overview only and should not be considered a comprehensive statement on any matter or relied upon. Consider obtaining personalised advice from a professional financial adviser and your accountant before making any financial decisions in relation to the matters discussed in this article, including when considering tax and finance options for your business. Westpac does not endorse any of the external providers referred to in this article.