Steps in Preparing Business Budget by pab38554


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Steps in preparing a cash-flow budget checklist
(You can print out this checklist to work through it.)

Step                  Tips and factors to consider
1. Estimate cash      Resist the temptation to over-estimate your sales.
receipts (including
GST) over the         Are your sales all for cash, all on credit or a mixture?
budget period.
                      If a mixture, what proportion each month is likely to be in

                      Is the proportion likely to be the same each month, or
                      will seasonal factors have an influence?

                      What is the pattern of cash receipts from debtors (credit
                      sales) likely to be? What proportion is likely to pay in the
                      first month, second month and third month after the
                      sale? List the assumptions that you make on this and
                      enter the amounts on a separate working paper for input
                      to your cash flow budget.

                      Do you propose to sell any assets surplus to your
                      requirements? This would represent another source of
                      cash receipts.

                      Have you negotiated any loans that you propose to draw
                      down in the period covered by your cash flow budget?
                      The loan proceeds represent another form of cash

2. Estimate cash      Identify all cash expenses incurred in the operation of
payments              your business and list them in alphabetical order.
(including GST).
                      For each expense, determine how often payment needs
                      to be made, when the payment is required and how
                      much the payment will be.

                      Cash payments should be entered in your budget in the
                      month when they will be paid, not when the obligation is

                      Payments for stock can usually be determined as a
                      percentage of the sales you have forecasted.

                      If your current stock level is too high, do not replace
                      stock with new stock as you sell it.

Step                  Tips and factors to consider
                      If you plan to build up your stock, increase your annual
                      purchases by the planned increase in stock. Consider
                      how you will spread your purchasing over the year.

                      Based on the payment terms you have negotiated with
                      your suppliers, determine when you will have to pay for
                      your stock purchases. You may wish to maintain a
                      separate working paper on this for input to your cash-
                      flow budget.

                      For items paid weekly, allow for the months that have
                      five pay days, not four.

                      Don’t forget to include your personal drawings from the

                      As well as regular expenses, do not overlook items such
                      as tax payments, the purchase of capital items such as
                      plant and equipment and loan repayments.

                      It is often a good idea to work first on the cash-payments
                      side of your cash-flow budget – expenses are often
                      easier to estimate and their timing is usually known. This
                      approach will help to build your confidence, especially if
                      cash-flow budgeting is new to you.

3. Include a          Keep some contingency funds in your budget –
measure of            something may go wrong at the worst possible moment.
flexibility in your
cash-flow budget      You can do this by considering some “what if” scenarios,
by way of in-built    such as the impact on your cash flows should:
buffers.              – sales fall off by....................
                      – costs rise by....................
                      – interest rates go up by....................
                      – suppliers are late with their deliveries.

4. Calculate the      This is obtained by subtracting the total of cash
net cash surplus or   payments from the total cash receipts – a surplus arises
deficit for each      if budgeted cash receipts exceed budgeted cash
month.                payments; a deficit results if your estimate of cash
                      payments exceeds your estimate of cash receipts.

5. Add in cash on     This is represented by your bank balance at the start of
hand.                 the period for which you are budgeting. If the balance is
                      an overdraft, use brackets to show a negative figure.

6. Calculate the      This is achieved by adding the net cash surplus or deficit
closing bank          for the month to the previous month’s bank balance.
balance for the first

Step                      Tips and factors to consider
month and
progressively for
each month
7. List each              This is of great assistance when you monitor and review
assumption                actual performance against budget projections.
separately as you
prepare your cash-        It also helps to develop your budgeting skills – as part of
flow budget.              the budget review process, you can identify assumptions
                          that may have been set too conservatively or,
                          conversely, too aggressively. Such situations can be
                          taken into account when compiling cash-flow budgets in
                          the future.

                          It is only after considering assumptions carefully that you
                          will be able to assess the validity of financial projections.

8. Make decisions         These management decisions reflect the fundamental
about the                 purpose for preparing a cash-flow budget.
investment of any
short-term cash           If the need for short-term borrowings is identified, you
surpluses that may        can make a timely approach to your banker and
be generated or           demonstrate that you are managing your business pro-
extra short-term          actively.
borrowings that
may be required to        If cash surpluses are projected, you can shop around for
sustain the               the best interest rate, consistent with the level of risk you
planned operations        are prepared to accept.
of your business.
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