A small business must maintain healthy cash flow as it is considered to be the life blood of a company. Using a cash budget is one way of keeping the cash flowing. Cash flow is alternatively expressed as an analogy of water flowing into and out of a storage tank. The water is the money flow, and the amount of water in the tank at any time is the amount of solid cash on-hand. This is important because some cash must be readily available just to deal with day-to-day business operations. All the cash cannot be locked up in long-term profitable investments with high yields.
A cash budget is a good tool for analyzing the amount of cash flowing into a company and retained by that company. For a small business, this should be done on a monthly basis. This type of diligent account is referred to as a rolling budget because the owner stays on top of the numbers very carefully and every month.
There are two things to take notice in regarding the cash budget. It should be used as a day-to-day tool to help run the business while staying within the budget. Budgets should also be used for planning, which means the budget needs to be projected into the future. It is a good idea to get together with the managers in the company in the winter quarter and hammer out a 12 month budget for the next year. Of course, if the stock market fails and economy crashes, then the budget has to be revised. Thus, the result is a 12 month rolling budget.
Admittedly, the term cash budget sounds ominous and intimidating, but the truth of the matter is that some effort must be made to control cash flow. This is true even if the budget is formed under conditions that are considered somewhat impromptu and ad hoc. Getting a handle on cash flow is critical.
This article was written by Richard Carranza of Examiner.com for CBS Small Business Pulse.