4 steps to create a simple cashflow budget for your business
Cashflow is the life blood of your business. Money flowing in and out of your business bank account is what makes up your cashflow.
Every business needs to make sure they’re managing their cashflow so that more money comes in than goes out. Cashflow itself is straightforward, it's when you don't pay attention to it that you can have issues.
By creating a cashflow budget for your business you can take into account the money you need to pay for future tax and other outgoings, instead on only focusing on what is due this month.
4 steps to create a simple cashflow budget
One of the first things I do with my new clients is to create a cashflow budget. For the purposes of this blog, I'm sharing a simplistic way to create this kind of budget, as the details will vary from business to business depending on their circumstances.
Step 1: Estimate your outgoings
The first step is to estimate your outgoings for the next 12 months. This estimation is different to your overall business budget, where you estimate your total outgoings, as you’re going to estimate your outgoings for each MONTH. The total of all 12 months will match your overall business budget.
You’ll be able to estimate some outgoings with a high degree of certainty, e.g. your professional indemnity insurance is $2000 per year and is due on 30 November. While other outgoings will be less certain, e.g. Paypal fees, as the amount you pay will depend on the number of sales each month.
Step 2: Estimate your income
The next step is to do an estimate of your business income for each month. Be conservative! While I encourage my clients to think big when it comes to their business income goals, when it comes to your cashflow budget it’s better to use a lower estimate.
A reasonable place to start is to base your income on your historical earnings plus 5%. Be sure to factor in anything that could impact on your income, e.g. long holidays, time away from business for any reason.
Step 3: Estimate your tax
The third step is to estimate your tax.
In the interests of simplicity, we'll use a figure of 15% of your income for your tax. This figure is likely to be higher than you’ll need to pay for your business tax because you'll be able to deduct certain expenses from your business income. Which expenses you can deduct will depend on your business, this is an area I go into with more detail when I work with my clients, so we have a more accurate estimate of their tax situation.
Step 4: Calculate cashflow for each month
The last step is to deduct your estimated tax and outcomings from your estimated income for each month.
You’ll then be able to see which months you may have an issue with your cashflow, i.e. more cash is going out than is coming in.
Bonus Step: Bank account impact
An extra step I like to do is have an opening bank balance for each month and subtract or add the net cashflow for the month and calculate the closing back balance. Then use this closing bank balance for the opening of the next month. This means I can easily see where the bank is going into a negative situation.
Now that you have a clearer picture of your cashflow, you can start to manage any months where you can see you will have an issue (the negative bank balance can help with this as well).
One example of managing your cashflow would be to review the timing of your payments, e.g. instead of paying your insurance in one annual payment, because you get a discount, you could switch to monthly payments.
Another example is to limit the amount of your drawings (or owners' salary) when you know you have a negative month coming up, because you’re away on holiday. By limiting your drawings you’re effectively saving up for future outgoings.
While managing your cashflow can initially feel overwhelming, we can create a cashflow budget to help estimate the movement of your cash, which then allows us to manage any cashflow issues in advance.
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