Budget? Cashflow Forecast? Help!!!

Hamish Mexted Managing Cash

At some point, most business owners are kept awake by their business’s cashflow.  Despite such worries, many businesses only have a rough budget and no cashflow forecast.  So, why are these important and why do you need both?

A budget looks at the profit you’re going to make, while a cashflow forecast looks at when the cash is coming in and going out.  By understanding where and when the cash is coming from, or going to, you’ll have a better grasp of where you’re at, and hopefully be able to sleep easier.

Let’s say for example you invoice a job out for $1,000 in April, with costs relating to this job being $300 of materials and $200 of wages.  Your budget will show this job giving you a profit of $500 ($1,000 – $300 – $200 = $500).  However, let’s say you don’t get paid until June.  You’ve probably paid the wages relating to the job in April ($200) and for the materials in May ($300).  This means you’re out of pocket by $500 for two months.  While this is a simplistic example of the difference between cashflow and profit, it illustrates why you need both a budget and a cashflow forecast.

The first step to creating your cashflow forecast is determining how long customers typically take to pay you.  For example 45% may pay within 30 days of being invoiced, 35% in 30 – 60 days and 20% in 60 – 90 days.  This gives you a rough outline of when will receive your budgeted sales from each month.  You can do the same with your payments to your creditors.

These percentages and your monthly budget form the basis of your cashflow forecast.  With these you’ll be able to identify how much cash from day-to-day trading will be received and spent each month.  Aside from day-to-day trading, there are many other areas cash comes from or goes to within your business that won’t be included in your budget.

The first is GST.  A budget is usually GST exclusive, while a cashflow forecast is GST inclusive.  This is important because the timing of receiving the GST in from your customers, or paying it out to your suppliers, is different from when you make the payment to the IRD.

Secondly purchasing new fixed assets, such as a vehicle, isn’t shown in budgets.  This is because buying an asset isn’t an expense – it’s a transfer from one asset to another (from your bank account to the vehicle asset you’ve just purchased).

For the same reason debt repayments aren’t shown in a budget, yet they need to be included in a cashflow forecast.  Repaying the principal (opposed to interest) on a loan isn’t an expense that goes into your budget, but it is cash going out.  This means it needs to go into your cashflow forecast.

Tax payments are also calculated differently in a budget compared to a cashflow forecast.  In a budget tax is either calculated on monthly profit, or not at all.  However in a cashflow forecast the actual tax payments are picked up in the month the payment is actually made (usually August, January and May).

Sure, it can be a little complicated to put together an accurate cashflow forecast.  However your accountant should be able to help you bring together the information you need.  Alternatively drop us an email or give us a call and we’d be happy to help.

By combining the cash in and out from your day-to-day trading, along with the timing of your GST and tax payments, buying new fixed assets and making debt repayments, you’ll have a better understanding of your cashflow.  You’ll then be able to manage your business better, and hopefully sleep a little easier.