Budgeting in a small business is a neglected area. It is only when business plans are required that the business owner will prepare a cash flow forecast or budget.
Most businesses divorce the budget from the cash flow forecast. In fact, the cash flow forecast is only furnished when requested by the bank in most cases. Businesses have yet to learn that the cash flow forecast is a valuable tool for analyzing internal finances.
Collapse a budget and cash flow forecast into ONE. And allow the cash flow forecast to serve as your business’s financial map, for the next 12 months. Budgets are vigorously implemented, only when a business starts shedding cash. And major expenses are cut, drastically, when the owners and their accountants draw up budgets.
A budget will target, run away expenses, in an attempt to bring it under control. The main expenses to normally go would be staff costs (lay offs), insurance, advertising and stationery. Telephones are barred and transports costs are reduced radically. So the budget is expense focused.
Furthermore, if a budget was drawn up for previous years, it is highly likely that, sales could have been too optimistic, and cognizance was not taken of credit sales and its impact on cash flow. Hence my departure from accepted practice, and proposing combined cash flow and budget.
Overheads/ Cash outflow
I concede, that high overheads, is a killer for many small businesses. But the obsession with overheads is not going to save your business. You in business to grow sales and not to be bogged down by high overheads! If phone calls are barred, or the advertising budget is slashed, more problems would be created, than solved. Evaluate carefully if an expense is linked to business growth, and think twice, before slashing that expense. Say you incur an advertising cost of $ 10 000.00 per year, and it can be proven that it brings in $ 20 000.00 in revenue. Reducing the budgeted amount by $5000 will affect sales adversely. If revenue is down, increase the advertising budget. If you lack skills, budget for more, not less, employees. And increase the telephone budgeted amount, you need that phone, to call more prospects. Of course, weak advertising campaigns, unproductive calls, and lazy staff cannot be entertained. Budget accordingly, but be very analytical in your approach.
Very little emphasis is placed on the cash income component, in a forecast. The cash inflow is only relevant in relation to how it affects cash outflow. If the inflow is too low, an adjustment is made to outflow. Rather remain focused on how cash inflow can be boosted as opposed to reducing outflows. Be optimistic about your cash inflows, not your revenues.
Don’t project for expected revenues, project for cash revenues, deposits, advances, sale of assets, based on current trends. A picture will begin to emerge of what your true cash requirements truly are in the business. If the report reveals that limited cash resources would be available, it means that more creative methods should be devised to increase cash flow, not radical reductions in cash outflows!
It might seem foolish to spend more on certain expenses, when cash flow is slow, but panic and fear is your worst enemy in a time of crisis.
If businesses don’t grow, they contract and die. The quickest way to shrink is to radically reduce important overheads.
Most businesses that reduce overheads, drastically, continue to remain stuck in a cash flow crisis! Energy (cash)flows where attention goes…