Cash is the oxygen for your business, without it your business will die. But do you know the status of the cash in your business now? It is a must to know your cash status as this will help you to make informed decisions when opportunities for growth or investment come along. Let’s look at how to set up your cash budgeting for your small business.
STEP 1: Choose your time period
The cash budget needs to be set across a certain time period. This is normally monthly or quarterly. It is not advised to set a budget beyond a year as you may not be able to accurately predict what will happen in your business beyond a year.
STEP 2: Choose your platform
If you are using an accounting program, they may have a cash budgeting functionality that you can use. Otherwise, you can use a simple spreadsheet template to set up your cash budget.
STEP 3: Decide on your ideal cash balance
This is the amount you need to cover your company’s expenses plus your profit and some extra money to build an emergency fund for those months when you struggle to hit your sales targets, or you have more expenses than you had planned for.
STEP 4: Calculate your expenses
Expenses can be divided into fixed and variable expenses. Fixed expenses are those expenses which don’t change month to month. They may have yearly changes but generally, they remain at a fixed amount. In fixed costs, you would consider rent, insurance, internet and phone, payroll, website hosting, subscriptions, and any other costs which remain constant in your business.
Variable costs change from month to month. They may increase or decrease depending on the activities of the business. Some areas to consider for variable costs are water and electricity, materials, shipping and delivery costs, travel costs, marketing, training and professional development, and any other costs which your business incurs.
Another area to consider is the once-off costs you may experience in your business. This may be license renewal for software you use, or it could be buying equipment for your business.
STEP 5: Look at your revenue sources
Depending on the business you run, you may have different revenue sources. When we look at income, we want to look at online sales, trade show sales, brick-and-mortar store sales, freelancing projects, consulting fees, and any other sources which bring cash into your business. If your business is new, you may have to take an educated guess for these amounts but if you have been in business for a while, you can look at what has happened in previous years.
STEP 6: Evaluate your cash budget
If you see that you are making a loss in certain months, then you can examine your budget and see how to compensate for these slow months. One method is to put away an additional amount during your busy months to cover your slow months.
When you have done your cash budget for a while you will also be able to see trends in your business and make informed decisions on how to build your business.
By following these six steps, you will be well on your way to having a clear view of where your business is heading and the next time you are asked about how your business is doing you will be able to answer with confidence. You may also have better success when asking for a loan for your business.
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