Cash flow management and budgeting A guide for small business operators and those thinking about starting their own business in Tasmania.

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Cash flow management
and budgeting
A guide for small business operators and those thinking
about starting their own business in Tasmania.
Department of Economic Development

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Cash flow
Overview
management and
Cash – the money flowing through your business from
cash register to bank account to supplier – keeps
budgeting
your business alive. Without cash flow, your business
would grind to a halt.
It is necessary, therefore, that your business monitors
its cash flow. The management tool that business
“Happiness is a positive cash flow”
owners use to do this is cal ed a cash flow budget.
It shows the expected flow of cash in and out of a



Frederick Adler
business and predicts the bank balance at the end of
each month. This al ows the business owner to plan
for those months when additional funds are needed
Contents
or consider how to make the best use of short term
surplus funds.
This guide is about managing cash in your business.
Overview
Page 
It highlights the difference between cash and profit,
explains the importance of cash management in a
business and outlines how to prepare a cash flow
Your business needs to be both profitable and liquid.
Profit is not cash
Page 
budget and keep it on track. It concludes by offering
Liquidity refers to the ability of your business to meet
practical tips for improving the cash flow in your
its commitments as and when they fall due.
business.
This means having cash available when required.
Cash is king
Page 4
A business may generate substantial cash receipts
but record a modest level of profit or even a loss.
“Ready money is Aladdin’s lamp”
Alternatively, a business in a strong growth phase may
generate increasing profits but be cash poor due to a
How to prepare a cash flow budget
Page 4



Lord Byron
higher commitment of funds to debtors and stock.
Planning for cash flow will ensure that your business
Comparing actual results to budget and determining future action
Page 7
Profit is not cash
can meet its day-to-day commitments in a timely
manner.
When using budgets in business, the distinction
Practical tips for improving your cash flow
Page 8
between profit and cash must be clearly understood.
“Profitability is the destination for your
Profit and cash are not the same thing. It is often said
business. Cash flow is the vehicle which
that more businesses fail through a lack of cash than
Summary
Page 10
a lack of profit. Why is this so?
enables you to get there.”

Al an Roark, Licensee-Manager,
A profit projection is the tool that al ows you to ad-

Archers’ Manor, Launceston
Resources and contacts
Page 11
dress the viability of your business. It shows how
much you can expect to earn over the next 1 months.
But in projecting a bottom line, it includes non-cash
expenses such as depreciation, does not take into
DISCLAIMER
account timing differences (eg payments to creditors
The information in this guide has been prepared with care, but no warranty, express or implied, is given as to the
and receipts from debtors) and excludes payments
accuracy, correctness or completeness of the information, or for any advice given, or omissions from this guide.
of a capital nature such as loan repayments and the
Therefore, readers relying on the contents of this guide do so entirely at their own risk and they should seek their
purchase of equipment. For these reasons, your profit
own independent legal and financial advice. The information is provided to intended parties solely on the basis
projection does not provide you with an estimate of
that they will be responsible for making their own assessment and undertaking such investigations as they see fit
your cash position.
to verify all relevant information to enable them to come to their own conclusions.

C a s h f l o w m a n a g e m e n t a n d b u d g e t i n g

Department of Economic Development

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Cash is king
Checkpoint ?
Your business first needs to survive before it can be
Here are the eight steps involved in preparing a cash
successful. And the crucial requirement for survival
flow budget:
is the availability of cash when you need it. Cash is
indeed king in the world of small business. This is
apparent when you consider what happens when
Step
Tips and factors to consider
serious cash flow problems arise in a business:
1. Estimate cash
Resist the temptation to over-estimate your sales.
• Confidence and morale are eroded and
receipts (including
Are your sales all for cash, all on credit or a mixture?
the excitement that being in business once
GST) over the
represented ebbs away.
If a mixture, what proportion each month are likely to be in cash?
budget period
Is the proportion likely to be the same each month, or will seasonal factors have
• The owner cannot buy time to work his or her way
an influence?
out of difficulties and sheer survival often means
What is the pattern of cash receipts from debtors (credit sales) likely to be? What
acceptance of less than the best option.
How to prepare a cash flow budget
proportion are likely to pay in the first month, second month and third month after
the sale? List the assumptions that you make on this and enter the amounts on a
• Contingency funds are not available to meet
separate working paper for input to your cash flow budget
emergencies.
A cash flow budget is a prediction or forecast of what
Do you propose to sell any assets surplus to your requirements? This would
• The business owner operates under constant fear
cash will be available to meet the expenses of your
represent another source of cash receipts
that wages may not be able to be paid or a critical
business over a nominated period of time, usual y 1
Have you negotiated any loans that you propose to draw down in the period
supplier will cease to deliver due to unpaid bil s.
months. It shows the expected flow of cash in and
covered by your cash flow budget? The loan proceeds represent another form of
out of a business and predicts the bank balance at the
cash receipt
• Desperate sales are made by the business, often
end of each month. This means that you can plan for
below cost, merely to survive. There are clear
those months when additional funds are needed, or
2. Estimate cash
Identify all cash expenses incurred in the operation of your business and list them in
limitations to this practice.
consider how to make the best use of short term cash
payments
alphabetical order
surpluses.
(including GST)
For each expense, determine how often payment needs to be made, when the
• Purchases in large quantities to attract volume
Keep in mind that a cash flow budget is a plan.
payment is required and how much the payment wil be
discounts cannot be pursued.
Although external events may cause variations in
Cash payments should be entered in your budget in the month when they wil be paid,
• The business cannot recruit and retain top quality
actual performance compared with what you have
not when the obligation is incurred
people as they seek a more certain future.
forecasted, it is the cash flow budget which will help
Payments for stock can usually be determined as a percentage of the sales you have
you to get your business back on track through the
forecasted
• Loan, lease, taxation and other commitments are
process of review.
If your present stock level is too high, reduce this purchases figure by the amount you
often paid late, incurring penalties and interest.
You can prepare a cash flow budget manual y or use
want to reduce your stock i.e. as you sell stock, you wil not replace it with new stock
To be successful in business, you must be in control
computer software packages like Microsoft Excel
If you plan to build up your stock, increase your annual purchases by the planned
of the cash situation, including the timing of cash
which streamline the procedure markedly. Your
increase in stock
inflows and outflows. The starting point is the cash
accountant can also be a source of major assistance
Consider how you wil spread your purchasing over the year
flow budget.
in this aspect of your business operations.
Based on the payment terms you have negotiated with your suppliers, determine
when you wil have to pay for your stock purchases. You may wish to maintain a
separate working paper on this for input to your cash flow budget
Cash flow management is the very lifeline of
For items paid weekly, allow for the months that have five pay days, not four
your business’s future growth.”
Don’t forget to include your personal drawings from the business
John Richards, Chief Executive Officer,
As well as regular expenses, do not overlook items such as tax payments, the
Conference Plus, Launceston
purchase of capital items such as plant and equipment and loan repayments
It is often a good idea to work on the cash payments side of your cash flow budget
first – expenses are often easier to estimate and their timing is usually known.
Adoption of this approach wil help to build your confidence, especially if cash flow
budgeting is new to you
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C a s h f l o w m a n a g e m e n t a n d b u d g e t i n g

Department of Economic Development

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Step
Tips and factors to consider
“If you don’t keep a close eye on cash flow,
3. Include a measure
Keep some contingency funds in your budget – something may go wrong at the
it’s possible to show good profits at the end
of flexibility in your
worst possible moment
of the year but have faced a financial squeeze
cash flow budget
You can do this by considering some “what if” scenarios, such as the impact on
on several occasions during the year”
by way of in-built
your cash flows should:
buffers

Al an Roark, Licensee-Manager,
-
sales fall off by ……………

Archers’ Manor, Launceston
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costs rise by ……………...
-
interest rates go up by …………..
-
suppliers be late with their deliveries
4. Calculate the net
This is obtained by subtracting the total of cash payments from the total cash
cash surplus or
receipts – a surplus arises if budgeted cash receipts exceed budgeted cash
deficit for each
payments; a deficit results if your estimate of cash payments exceeds your
month
estimate of cash receipts
Comparing actual results to budget
5. Add in cash on hand This is represented by your bank balance at the start of the period for which
and determining future action
(or deficit) at the
you are budgeting. If the balance is an overdraft, use brackets to show a
beginning of the
negative figure
You should regard your cash flow budget as one
budget period
of the most important management tools in your
6. Calculate the
business. It will highlight potential problems and,
This is achieved by adding the net cash surplus or deficit for the month to the
closing bank
previous month’s bank balance
because you are preparing it in advance as a planning
balance for the
tool, will al ow you time to find ways either to prevent
first month and
such problems occurring or to minimise their impact.
progressively
Refer to your cash flow budget at least monthly and
for each month
insert “actual” results. Then compare forecasted
thereafter
results to actual performance and calculate variations,
both positive and negative. This will highlight how
7. List each
This is of great assistance when you monitor and review actual performance
well you are doing and enable you to take corrective
assumption
against budget projections
action if necessary. Learn what is working and what
separately as you
“Cash flow analysis is just like preventative
It also helps to develop your budgeting skil s – as part of the budget review
is not. Conduct a review immediately after the end
prepare your cash
process, you can identify assumptions that may have been set too conservatively
of each month – timing is more important than total
maintenance on your motor vehicle; it needs
flow budget
or, conversely, too aggressively. Such situations can be taken into account when
accuracy.
to be carried out regularly if deep-seated
compiling cash flow budgets in the future
Also be prepared to use your cash flow budget as a
problems are to be avoided later”
It is only after considering assumptions careful y that you will be able to assess
communication tool with key staff and stakeholders
the validity of financial projections
outside your business. This could include your bank,

Al an Roark, Licensee-Manager,
other lenders, your accountant and major suppliers if

Archers’ Manor, Launceston
8. Make decisions
These management decisions reflect the fundamental purpose for preparing a
you are seeking to negotiate extended terms.
in respect of the
cash flow budget
investment of any
If the need for short term borrowings is identified, you can make a timely approach
short term cash
to your banker and demonstrate that you are managing your business pro-actively
surpluses that may
be generated or
If cash surpluses are projected, you can shop around for the best interest rate,
extra short term
consistent with the level of risk you are prepared to accept
borrowings that
may be required to
sustain the planned
operations of your
business

C a s h f l o w m a n a g e m e n t a n d b u d g e t i n g
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Department of Economic Development

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Practical tips for improving your
Practical Tip
Actions I need to take
cash flow
Evaluate whether to take a discount or to offer
a discount
Checkpoint ?
Use the fol owing checklist to evaluate your existing
Avoid or minimise bad debts through an
cash management system and identify actions that
established credit assessment procedure
need to be taken to improve cash flow in
your business
Carefully assess the true benefits of “deals”
Practical Tip
Actions I need to take
Manage your banking relationship pro-actively
Control the level of overtime worked, evaluate
the use of part-time and casual staff rather
than permanent staff and negotiate payment to
Increase the proportion of cash sales
sales people based on results
Investigate implementation of a system of
Consider using sub-contractors rather than
“pay on invoice only”, rather than sending out
buying your own equipment
monthly statements
Speed up your invoice process and collection
Consider buying used equipment
practices
Get paid for your credit sales more promptly
Rearrange annual payments such as insurance
through progress payments, payments with
to times of less financial pressure or pay
orders, deposits with orders and use of credit
smaller amounts more frequently
cards
Set aside cash each month to meet tax bills
Establish an accounts payable policy
Don’t keep idle balances in accounts that do
Review each step in your stock management
not pay interest – ensure any short term cash
system
surpluses are invested wisely
Evaluate ways of getting your stock on better
“Apply an equal amount of research and
terms such as consignment stock, extended
credit terms, forward dated invoices for
energy to your cash flow as you do to
seasonal purchases, discounts for prompt
marketing your business”
payments and scheduling deliveries as late as
possible
John Richards, Chief Executive Officer,
Conference Plus, Launceston
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C a s h f l o w m a n a g e m e n t a n d b u d g e t i n g

Department of Economic Development

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Summary
Resources and contacts
• The first rule of business is don’t run out of money
• Australian Government Publishing Service,
Cash Flow – Cash Management
• Cash is the lifeblood of your business. Without it,
(Managing the Small Business Series)
your business can fail
• Australian Government Publishing Service,
• A cash flow budget is the management tool that
Financial Budgeting in Small Business
shows the expected flow of cash in and out of a
(Trimpac Series)
business and predicts its bank balance at the end
of each month
• CPA Australia,
www.cpaonline.com.au
• Learn to differentiate clearly between cash and
Level , 1 Kirksway Place, Hobart Tas 7000
profit
GPO Box 0, Hobart Tas 7001
Telephone  818701
• More businesses fail through a lack of cash than a
or the accounting firm of your choice
lack of profit
• Department of Economic Development,
• Planning for cash flow will help to ensure that your
Business Point
business can meet its day-to-day commitments in
www.development.tas.gov.au
a timely manner
Telephone 1800 440 0
• When preparing a cash flow budget, build your
• Institute of Chartered Accountants in Australia,
self-confidence by directing attention to the cash
www.icaa.org.au
payments side first. Outgoings are often easier
Level , 00 Bourke Street, Melbourne Vic 000
to identify and estimate and their timing is usual y
Telephone  411
known with greater certainty than cash receipts
or the accounting firm of your choice
• Build flexibility into your cash flow budget by
• National Institute of Accountants,
considering a number of “what if” scenarios
www.nia.org.au
• Compare actual results against budget as soon as
1/ Elizabeth Street, Hobart Tas 7000
practicable after the close of each month and take
Telephone  107
corrective action where necessary
or the accounting firm of your choice
• Be prepared to use your cash flow budget as a
• Your nearest business enterprise centre
communication tool
www.development.tas.gov.au
• Constantly review the management of cash
resources in your business and always be on the
lookout for practical measures to improve its
cash flow.
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Department of Economic Development

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Department of Economic Development

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