When a company wishes to see its projected cash inflows and outflows for a certain period of time it makes use of the cash flow budget. This can predict the expected receipts of cash as well as cash disbursements each and every month. The cash flow budget can also, if so required, predict cash inflows and outflows on a day to day or even weekly basis. It may be noted that trying to project too far into the future is not so useful for the cash flow budget, it is best to prepare it for the near term, rather than long term; while periodically updating the budget. When a cash flow budget is not periodically updated, it can become a stagnant document and the purpose of such a budget is pointless.
This leads one to believe that the cash flow budget should look at a six month period in order to minimize the level of uncertainty involved in making a long-term budget. In
addition, this much time should suffice to take early action to correct errors based on the six month period predictions. In the case of applying for loans, the need may arise to predict future cash inflows and outflows over a period that spans several years and for such an application process it may need cash flow budgets that look at several years ahead, instead of months, but these figures should be prepared only when required.
The main objective of the cash flow budget is to predict to the entity cash inflows and
outflows for a period of time. Obviously, cash inflows need to exceed cash outflows and, if not, the model can be adjusted. Such a cash flow budget will enable the business to have an idea of the amount of cash resources sufficient for making business expansions and give adequate support to the business owner.
Another useful aspect of the cash flow budget is its ability to pinpoint periods when the cash outflows exceed the inflows, which is known as a cash flow gap. Knowing the extent of the cash flow gap will allow the business managers to take remedial steps to at least restore the balance or else reduce the gap. It could result in reducing the amount of investments made in asset or inventory as well as whether to seek outside sources of cash like getting a short-term loan, to fill up the gap amounts.
Making the cash flow budget may involve four steps, which include preparation of a sales forecast, projection of your anticipated cash inflows, projection of your cash outflows, and finally, putting all the projections together and creating the cash flow budget, which would show the net cash flow.
The cash flow budget is an important financial statement and needs to be carefully prepared. A good option is to purchase from a vendor specializing in such documents. For a few dollars one can have a ready-to-use template and can then prepare a comprehensive cash flow budget for the month or for a lengthier period of time, as per individual needs.
Author Resource:-
Wade Anderson is a CPA and operates DigitalWorkTools.com. Click to view a Cash Flow Budget
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