Your cash flow budget is the most important financial statement that you have. Done correctly, it provides your business with the necessary checks, balances, and financial controls to guide performance; wins bankers' hearts; and keeps spending and investment impulses in check. Developing a budget is simple, and when created with solid sales and expense forecasts in mind, you can ensure that your budget will stand up to the daily demands of your business.

Here are some steps you can take to create a cash flow budget you can rely on:

  • Set business guidelines and goals.
  • Review current economic and business conditions; consider how they will affect your business.
  • Forecast sales for the budget period.
  • Forecast expenses for the budget period.
  • Prepare a profit-and-loss projection.
  • Run a reality check on the numbers. Compare them to your goals, trade figures, and historical figures.
  • Project monthly cash inflows for the budget period.
  • Project monthly cash disbursements (outflows) for the budget period.
  • Project operating data. Move controllable items around to achieve the best positive cash flow possible.
  • Prepare your cash flow budget: the "finished" cash flow projection. Look for periods of negative cash flow, as well as unusually positive periods.
  • Compare budgeted with actual performance monthly.
  • Review performance and recast forecasts (both P&L and cash flow) annually or as needed.

This material was adapted from Chapter 6 of Financial Troubleshooting by David H. Bangs Jr. and Michael Pellecchia.
Copyright © 1999 Goldhirsh Group Inc.