Creating a cash budget. A guide for Australian businesses.

Taking time out to create a cash budget is time well spent. Tracking your cash flow and business budget month by month may help you plan ahead and take advantage of opportunities. Best of all, it's really not complicated. Just follow the steps below.

What we'll cover

• The definition of cash budget and its purpose
• Knowing your cash flow
• Creating your cash budget
• Calculating your cash position
• Using your cash budget for business planning
• Simplifying cash budget calculations.

Key take-outs

• When you know your cash flow you can create a cash budget
• Your cash budget is an indication of your business's liquidity
• Your cash position can guide how you spend and invest
• A cash budget can be an important strategic tool
• Separate bank accounts can simplify cash flow calculations
   

What is a cash budget and what is its purpose?

A cash budget is an estimation of your cash flow over a given period, such as a month, quarter, or year. Its key purpose is to establish your cash position, which predicts your business's ability to take in more cash in income than it pays out in expenses.

 

An annual cash budget, for example, can factor in any seasonal fluctuations that affect your business, giving you a more accurate overall picture of your finances. A long-term cash budget is an important indicator of long-term liquidity.

 

Creating cash budgets and calculating your cash position are relatively simple and can be done in three steps.

1. Know your cash flow

Your cash flow budget tracks all the cash inflows (receipts) and cash outflows (payments) going through your business.

Inflow

Your inflow is the grand total of your customer sales, other business income and receipts. 

 

• Cash payments: Customer purchases where payment is made at the time of the sale, including credit card purchases.
• Accounts receivable (debtors): Payments received from invoices.
• Other business receipts, including:
  • Interest
  • Dividends
  • Subsidies
  • Grants
    
    

Outflow

Your outflow is the total sum of all costs incurred in running your business, including all the payments you make:  

 

• Accounts payable (Creditors): Payments to suppliers/creditors.
• Long-term debt payments: Interest and principal payments, for example.
• General expenses: Rent, electricity, office supplies, advertising, accounting fees and maintenance.
• Other expenses: Mostly less-frequent costs such as tax, GST, PAYG, super and insurance.
• Employee wages and salaries.

2. Create your cash budget

Review your cash position at least once a month, and make sure you schedule the task in your diary, so it isn’t forgotten. This should ensure you always have an up-to-date sense of your cash flow.  

1. Determine your starting amount (i.e. how much is already in your bank account).
2. Add income and receipts (incl. GST) you expect to receive that month. This will clarify the total cash available for the month’s expenses and payments.
3. Repeat for expected expenses and payments (incl. GST), including any infrequent expenses such as tax or insurance.

3. Calculate your cash position

Once you know your cash inflows and outflows, you should be able to work out your cash position and the beginning cash balance you'll be starting each accounting period with. 

Total cash in – Total cash out = Cash balance

Things you may wish to consider based on the outcome of your cash position:  

 

• Positive cash balance:
  You may have enough cash spare to spend, invest in your business, or set aside in a savings account for unexpected expenses.
• Negative cash balance:
  You may have to find alternative cash sources (such as a business loan) to keep your business running, or identify ways to reduce operating costs.
• Neutral cash balance (around zero):
  You have no free cash flow available for savings, investments, and business purchases.

How can a cash budget help with my business planning?

Keeping on top of your cash budgets can provide you with valuable insights into the financial health of your business. This is particularly important if it’s subject to seasonal volatility of both income and fluctuating prices for raw materials.

 

Your cash budget can help you decide the best time to invest in growth versus carefully managing costs to maintain liquidity – so it’s an important strategic tool.

How can I simplify cash budget calculations?

Having a business bank account that's separate from your personal finances will help simplify your cash budget calculations each month, by keeping business and personal expenses well apart. A clearer view of your business inflows and outflows also helps you track performance and plan for tax time. 

 

With Westpac for example, you can choose between a $0 monthly fee business account (Business One) and an added value business account (Business One Plus) that gives you access to exclusive discounts on popular business products and services. Unlimited electronic transactions are included with both accounts, and to simplify financial management and bookkeeping you can connect them to accounting software such as MYOB and Xero.