Cash budget: having a clear vision and remaining proactive

It's crucial for all companies to develop a cash budget and have a clear understanding of its liquidities.

Managing cash flows is always a key concern for business leaders. Companies need capital to meet their financial obligations, such as payroll, accounts payable, loan repayments and business investments.

Having sufficient cash on hand is more important than ever to ensure the sustainability of the organisation. Your business' survival depends on it. In turbulent times, your cash budget can come to the rescue by preventing critical operations from being hard hit.

Cash budgets are typically calculated monthly. But in special situations such as those that have occurred over the past years, you might want to review your cash assets as often as weekly.

Here's how to prepare a cash budget in four steps:

1. Project your accounts receivable realistically

Review your payment requirements and realities. For example, even if you require payment within 30 days, you might have a client who typically takes 45 days to pay invoices. This is an important factor to consider when projecting your accounts receivable.

In other words, an invoice issued in July might not translate into a deposit until September. Also, in times of turmoil, some clients may take longer than usual to pay invoices.

2. Review other cash sources

You may be expecting income from other sources, such as:

• Deposits from clients for upcoming work;
• The sale of fixed assets;
• Grants, government assistance or tax credits for which your company is eligible;
• New loans or deposits from an available line of credit.

3. List all your expenses and other cash outflows

The easiest way to do this is to look at your expenses from the previous period (month, quarter or year). You may find it helpful to categorize expenses based on whether they are fixed or variable.

Fixed expenses—like administrative salaries, rent, insurance, travel expenses and utilities—are those that you have to pay regardless of the business' earnings. They are the largest source of pressure on a company's cash flow.

Variable expenses (or cash outflows)—like raw materials, direct workforce wages and royalties—are subject to change, depending on the company's earnings. Typically, these expenses are scaled back as revenues decrease.

At this stage, you should also take into account the company's loan payments (capital and interest). Loan deferrals or other relief measures may be available. It is therefore important to stay informed.

4. Analyze your accounts payable (suppliers, taxes, payroll, etc.) for the previous month, quarter or year

What payment terms apply? When will you be able to make your payments? It's very important to know exactly when you plan to make these payments so that you can compare them to your projected deposits for the same period. That's how you predict a cash shortfall or surplus for a given period.

By following these four steps, you'll have a better understanding of your business' cash flow situation and be better prepared to take proactive measures as needed.