Creating a cash flow budget

I like to tell my students that I could never have made it through my doctoral program without my cash flow budget. I always emphasize this because it was that critical for me to have enough cash on hand each month to meet my monthly and semester bills. Without my budget, it would have been very easy for me to spend a bit too much early on in the program and then be left short toward the end.

As you can imagine, living for four years without a regular paycheck was quite a shock to my budget. Sure, I had a little money coming in in dribs and drabs, but only a fraction of what I had been used to earning before starting the program.

Cash flow budgets are not just important to us individually, they are critical to business enterprises — especially at start-up. Did you know that one of the major reasons a small business fails in its first year is lack of cash? It takes time for a business to turn its first profit and if you do not have enough cash on hand (or secured a large enough line of credit for the times when extra cash may be needed), all the brilliance of your business model combined with your strong will to succeed may not be able to stave off failure.

The cash budget can be prepared fairly simply using a spreadsheet that can be updated monthly as experience and history unfold. The format is:

Beginning Cash Balance

+ Expected Cash Collections

= Total Cash Available

- Expected Cash Disbursements

= Cash Subtotal

+/- Financing Transactions

= Ending Cash Balance

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The cash budget should be laid out typically on a monthby-month basis and carried forward into the future at least a full year. Under special circumstances it can be laid out week-by-week or even day-by-day basis.

The “beginning cash balance” is simply the amount of cash on hand on day one. For simplicity, use the balance in your checking account. The balance in your savings account can also be included in your budget in a footnote section because a transfer of funds to your checking account is generally necessary to be able to use these funds. Money in a 401K, though, is not cash due to the fact that penalties and interest are imposed upon early withdrawal and because early withdrawal is generally unwise. Money invested in stocks and bonds might be accessible and worth noting, but again in a footnote section if these funds can be liquidated if and when needed.

“Expected cash collections” include the cash and checks one expects to collect during the month from customers and others. In some businesses, cash may be collected immediately from customers and in other businesses cash is collected 30, 60 or even 90 days after the sale is complete. Be sure not to anticipate the collection of cash faster than it is reasonably expected to be collected.

The subtotal of the two above is “Total Cash Available.” This represents how much cash may be spent or saved during the month based on funds currently expected to be on hand.

“Expected Cash Disbursements” include all predictable expenditures that will come due during the month. Each separate bill should be itemized at the amount expected under the belief that it is better to plan for the expected amount than to omit a bill whose amount is unsure. Once the exact amount is known, the budget can be updated, if you wish.

The “cash subtotal” will either be negative or positive. Remember this is a planned amount that can be rectified before the bills actually come due by borrowing money or cashing in investments. This is where planning the financing transactions come in to play. If the “cash subtotal” is excessive, the excess money can be invested to earn a return and if it is deficient, borrowings can be sought if needed.

The purpose of projecting the cash budget out over the long run horizon is to be able to plan you financing needs over time. It is better to ask for the full amount that may be needed over the next year than to make a series of individual smaller requests because the former indicates good planning and the latter a lack of planning.

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Kay Zekany, Ph.D., CMA is Assistant Professor of Accounting at McNeese State University. Contact her at 475-5538 or kzekany@mcneese.edu.