Many people start businesses but can’t make it past the first few months for a surprisingly basic reason; they run out of cash. How can you prevent this?

Everyone knows you need to forecast the 3 traditional financial statements (balance sheet, income statement & cash flow statement) to know where you are financially. What so many organizations forget to do also is the 4th financial worksheet; their cash budget.

The cash budget is a simple-to-use tool that calculates cash in, cash out & net cash. These 3 results are critical to your ability to understand your cash position in advance of needing to make important decisions. The cash budget allows you to understand & control your cash; the lifeblood of every organization.

In order to get your cash budget to work for you, you need to start with your projected sales. Then, you can calculate:

the amount of cash your entity will collect each month (cash in)

  • how much cash you plan to spend (cash out)
  • the difference (net cash)
  • your target or desired minimum cash balance (your set as your cushion)
  • how much (if any) cash you need to borrow that period
  • what the ongoing loan balance is on your line of credit
  • what cash is available to repay the line
  • what excess cash is left for short-term investments

In order to gain the most out of this tool you want to remember the 3 rules of cash flow planning; namely:

  • sales will be less than planned.
  • everything will cost twice as much as predicted
  • collections of receivables will take longer than expected

Knowing these, you want to adjust your forecast accordingly so it is as realistic as possible. After you have used & tweaked your cash budget for 2 to 3 years you will have a better idea of the seasonality of your cash flows. This will allow you to make the small adjustments that constantly makes it more accurate, reducing the need for a large cash cushion. And a more accurate cash budget makes for a better run organization & fewer sleepless nights. By creating, using & adapting your cash budget regularly you can both manage your cash & your borrowing needs simultaneously.

If you would like an Excel® model of the cash budget referred to above or a no-cost assessment, please contact me at DanielFeiman@BuildItBackwards.com

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