Cash is like oxygen to a business owner. It’s necessary. The struggle comes when business owners get confused and frustrated trying to manage the cash flow of their business. It shouldn’t be so hard to predict cash collections and then match expenses against that. But when growth happens, receivables go up and cash goes down because revenue lags expenses unless you’re a cash business.
I’ve been working with a very successful professional services firm for about a year now. They took out a PPP loan in round one, which provided much needed cash at the height of the pandemic. But they didn’t qualify for round two because this firm is tied to the construction industry and their volume has taken off. They’ve hired more people to handle the load and took out a short-term loan to handle the increased payroll.
Now with a large receivable coming in, they are looking to pay off their short-term loan and their line of credit. They’re also looking to set aside some cash reserves to have an operating cushion and get caught up on tax estimates. Lastly, they want to retire a shareholder in the near future. All these things require cash.
As a business owner, it’s easy to look at this list and become overwhelmed at how each of the items impacts the others and how much cash is required. These business owners won’t be successful unless they put together a cash budget to make sure they have the funds to accomplish all these things, plus have enough cash to operate the business.
A cash budget is an estimate of cash inflows and cash outflows for every month with a beginning and ending cash balance for those months. The ending cash balance becomes the beginning cash balance for the following month. The cash inflows are monthly collections as they come in. They can include borrowing on the line of credit too, if necessary. The cash outflows are any cost of sales, overhead, debt repayment, and owner’s distributions. When creating your budget, it’s a good idea to establish a minimum amount that you want to always have on-hand in cash. That way, you are prepared to cover unexpected expenses and it gives your cash flow some wiggle room.
In this client’s situation, it’s going to take us 5-6 months to accomplish everything mentioned based on estimates. However, if collections have been overestimated or expenses underestimated, it could take longer. But the reverse is also true, and time could be shorter. It’s a best practice to have a cash budget for the year and a second one that is a 90-day rolling period and is reviewed daily. This allows you to have a plan for the year, as well as a shorter-term view of where cash stands so you can adjust when needed.
Remember, cash is like oxygen for your business. Be sure you have plenty of it so your business can breathe. With a cash budget in place, you’ll no longer worry if there’s a blind spot you’re missing. In no time, you’ll be traveling the road of great cash flow and more satisfaction from your business.
P.S. If you’re struggling with how to make a cash budget happen, there’s no need for you to try and do this alone. Let’s talk today!