Financials & Advisers

Why Use Cash Flow Budget?
A cash flow budget is a guide that helps the business project its current and future cash needs. One of the important functions of the cash flow budget is that it pinpoints the times in the future when there is a shortfall (because not enough cash is coming in or too much cash is going out) so strategies can be put in place to meet that cash shortfall when it arises.

Even if the future cash needs are difficult to predict, it is better to have a “guesstimate” than no plan at all. Budgets are known as management tools because it provides management with the information to make decisions and put in place plans for protecting the business if required.

By preparing “predetermined cash plans” that the business sets up at the beginning (cash budget) and comparing this plan with the actual cash performance, an early indication is revealed that shows management whether the business is performing better or worse than planned. This gives management time to put steps in place to cope with any potential problems.

Set Budgets for 12 month periods
Most budgets are set for the following 12-month period. This is generally broken up into 12 individual months. As the business owners, take the time to organise a proper cash flow recording system. Such a system would give you more confidence about running your business because you would not be running blind. You would have guidelines in place to work from.

Budgets do not have to be “set in concrete”. That is, they are not tools that should never be changed. Always keep revising your budgets on a monthly basis. Your amended budgets would contribute to a more accurate picture of how your business was running.

Budgets are a snapshot giving a big picture position at any point during the year of operation. If they are regularly revised and amended, the snapshot will produce a clearer and more factual picture as time goes on.

Costing For the Business Owner
When a business owner has to calculate the cost of producing goods and services, a few costing methods can be used. If the business is in manufacturing for example, job or process costing can be the basis for calculating the cost of particular items.

Costs can be broken down into 2 varieties:

  1. Variable costs: These are costs that the business incurs during the process of producing its goods and will vary according to the level of production. That is, as sales increase, so production has to increase to produce more products to sell and expenses such as raw materials, packaging, direct wages etc will also rise with the level required. These are costs that vary depending on turnover, which also affects production.

  2. Fixed costs: These are costs that do not vary because they have no relationship to the level of sales or production. They are costs that are incurred and have to be paid whether the business is selling a lot or a little, and will be incurred even if the business is selling nothing at all. These costs are fixed and will include rent, insurance, salaries, power, telephones, insurance, etc. In essence, they are not affected at all by any increase or decrease in sales or production.

The total of variable costs is usually the direct cost of production because it is expenditure that is incurred directly for that purpose.

Fixed costs are also known as overhead expenditure and can be called indirect costs. That is, they are not involved directly in the production process, but are nevertheless incurred as part of the running costs of the business.