What is a cash flow budget

A cash flow budget is a budget that shows the estimated inflows and outflows for the upcoming period, which will indicate the payment ability of your company.

If there are two budgets that all companies should have, it is an income budget and a cash flow budget.

An income budget represents financial outcomes after a period, a cash flow budget focuses on whether a company possesses the funds to cover its actual costs. Combining both budgets gives businesses a strong framework for financial management.

How to set up a cash flow budget

Creating a cash flow budget involves a straightforward calculation:

Cash Reserves = Estimated Inflows – Estimated Outflows

This formula is great for figuring out your budgeted cash flow, letting you see if you have a surplus or a deficit for the period. If there’s a surplus, you’ve got extra money on hand which could be used for investments or to set aside as a safety net for unexpected expenses. However, if you’re facing a deficit, it means your funds aren’t sufficient to cover your upcoming bills, and that’s a sign you need to take quick action to address the shortfall.

What happens with a cash flow deficit?

If the cash flow budget shows that your company has a cash flow deficit, you should implement measures to strengthen your cash flow situation.

Strategies to improve cash flow include:

  1. Expense optimisation: Evaluate and potentially reduce costs by renegotiating contracts with suppliers or adjusting inventory levels.
  2. Pricing review: Regularly examine the pricing of your goods or services.  In this way, you are making sure that they match current market trends and meet customer expectations.
  3. Invoice factoring: To handle late payment problems, consider invoice factoring. For a small fee, this method gives you immediate access to funds as soon as invoices are issued, helping to improve cash flow.