Tight Cash Flow: The Secret to Effective Budgeting
As we know, Cash is King. Especially in business.
Understanding when you have high points and low points in your business’s cash flow can help you make better choices regarding the next investment needed for your business.
Developing a budget is a variable for determining your cash flow.
What is a Cash Flow Statement?
Simply put; this report details how money is flowing in and out of your business.
It shows the money you have used on investments or for paying back debt.
It also reports cash on hand and any pending payables and receivables.
What is a Budget?
Generally, your budget includes all your overhead costs including fixed costs that don’t change (like rent, utilities, etc.) and variable costs (like materials, production supplies, delivery costs, etc.).
Your budget should be built with proper estimations based on previous financial amounts and with future estimated amounts based on growth plans. Once you’ve completed a certain period, you will want to compare the budget you estimated to what you actually spent on your business. This will give you a better idea of where you actually spent money in your business and where you estimated incorrectly.
This type of planning can help with projections and help further the understanding of what your business truly needs to thrive (cash injection, manpower, equipment, etc.)!
The Difference Between Cash Flow and Budgeting
While the cash flow statement shows the circulation of liquidity (i.e. a company’s ability to raise cash when it needs it), the budget report shows the difference between your initial projections and the actual amount you have spent within a specified period.
Positive Cash Flow vs Negative Cash Flow
Positive cash flow is when you receive more cash than you pay out (which is a good thing!).
Being paid “first” is one of the ultimate keys to success if your industry allows for it.
Let’s take Sam’s Club, for example. They go through their inventory so quickly (because of their pricing strategy), that they are able to charge the customer and accept payment before the bill is due to their vendors. This results in positive cash flow and allows them to further invest into the growth of their business without taking additional financing.
Therefore, consistent, positive cash flow will allow you to take new opportunities in your business!
Negative cash flow is when you pay out more cash than you receive.
Consistent negative cash flow figures may indicate you are incurring losses. (Spoiler alert: this is something we help our clients with!)
Impacts of Cash Flow Planning on Budgeting
We cannot stress this enough: cash flow planning and budgeting are vital to planning out the future of your business.
Cash flow planning impacts budgeting as it creates a comparison between actual cash flow and your forecasted budget. It also allows you to make business plans for a specified period and allows you to project how much credit your business will need and plan how you will repay loans.
The Secret To Strong Cash Flow
While this most certainly can vary by industry, the number one thing to understand about cash flow is that you want to be paid first. Being paid first is the key to scaling more easily and is far less stressful when it comes to the day-to-day operations of your business.
What does it mean to be paid first?
If you are a consulting company, you want to make sure you’re paid for a portion of your work upfront.
If you sell products, it’s ideal to sell those products before you owe your vendor.
If you sell a monthly service, automating and collecting those funds on the first of the month ensures you don’t have to borrow funds to pay your bills that month (you’re also always a month ahead).
There are many ways to be “paid first”, and the sooner you get paid, the smoother everything else runs behind the scenes.
Most importantly, budgeting helps you plan out your long-term operating costs and estimates potential growth. It also allows you to make projections and develop sales goals which will allow you to scale and further continue to build your business.
Are you a small business owner wondering how cash flow and budgeting impact your business? Let’s chat about it!
Contact Indigo Bookkeeping Services today to learn how to improve your business returns.