How to do a cash flow budget (with example)

If you run a nascent SME, you’ve likely already encountered cash flow issues. Those scary periods where it seems like your expenses may eclipse your company’s earnings, and you may have to resort to borrowing. While not necessarily a prognosticator of doom for your business, relying on borrowing can eat into future profit margins and make future cash flow crises more likely. 

It’s easy to assume that a squeeze on your company’s cash flow is an inevitable part of doing business. Nonetheless, future cash flows are not beyond a measure of control. Adopt a proactive mindset and use cash flow budgeting to ensure accurate future projections. 

What is a cash flow budget?

A cash flow budget is an integral part of your cash flow management strategy.  Use it to estimate your cash flow over a given period (usually a week, month, quarter or even year). 

The data in your cash flow budget helps you to see whether or not you have enough liquidity to comfortably maintain your regular operations, and to gauge how effectively you are managing your assets.

Cash flow budget vs cash flow forecasting

Cash flow budgeting is easily confused with cash flow forecasting. However, these are actually two separate disciplines. 

A cash flow budget shows your expected income and expenditure for a given period. A cash flow forecast provides a rolling breakdown of when you can expect funds to be received or spent. 

Why is it important to do a cash flow budget?

Cash flow budgeting helps you gain a greater understanding of your financial health. Then you can make better-informed strategic decisions about your growth, capital expenditure and operational spending. 

It empowers you to identify operational expenses causing cash flow bottlenecks and find suitable workarounds. 

For instance, if fees from credit and debit card payments consistently eat into your margins, use an open banking solution like Instant Bank Pay to accept payment straight from the customer’s bank account without the hefty fee.

Cash flow budget example

Many automated tools help you set up a cash flow budget. However, some people think that setting one up manually is the best way to get to know the process. Many free spreadsheet templates can be used. Just be sure that they contain the right data. 

The examples below provide data for populating your spreadsheet. 

Start with your opening cash balance for the given period and work your way down the rows, inputting the following.

Revenues

• revenue from online or in-store sales

• other non-operating revenue from share dividends, profits from investments or from selling assets

Gross profits

Now that you have calculated your revenues, deduct your cost of goods sold (COGS) to calculate your gross profit margin. 

Expenses

Operating expenses are divided between fixed costs and variable costs.

Common examples of fixed costs include:

• rent

• insurance

• banking fees

• licence fees 

Variable costs may fluctuate from one period to another. These include:

• payroll costs

• shipping/warehousing costs

• utilities

• equipment/supplies

• marketing costs

• employee expenses (travel, subsistence etc.)

Net profit 

Deduct the expenses above from your gross profit margins for your earnings before interest and tax (and depreciation, and amortisation where relevant). Deduct your taxes and interest for the period to calculate your net profit margin.

Closing cash balance

Now you have enough data to calculate your net profit or loss for the period. This, along with your closing cash balance, lets you better understand your cash flow budget. Repeating this process regularly facilitates cash flow forecasting.

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