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Cash budgeting monitors operations.

In these tough economic times it is crucial that the small-business operator use every tool available to ensure continued success. One of these tools is the cash budget.

Not only is the cash budget a guide in daily operations, it is also a base with which to compare actual results and pinpoint areas of concern.

In addition, budgeting helps monitor sales growth so that you can plan for future external monetary needs and maintain financial flexibility.

All in all, budgeting aids us in the task of money management, which is one of the keys to success.

How does the average small-business person go about preparing a cash budget? Here are six straight-forward steps to follow:

I Map out a monthly sales forecast for a one-year time period. This is usually based on prior years' monthly sales adjusted for estimated increases or decreases during the year due to the economy, seasonal swings or changes in customer demands.

If yours' is a new business, sales for each month should be conservatively estimated based on competitor or industry trends and perceived demand.

I Estimate monthly cash inflows from sales based on your historical collection period. For example, what percentage of sales do you collect in 30 days, 60 days or 90 days? A current list of aged accounts receivable will give you a good idea of these figures.

I Estimate the monthly cost of goods sold based on your sales forecast. The cost of goods sold is the difference between the sales price and the markup, usually expressed as a percentage of sales.

I Estimate the monthly cash outflow from purchases based on your historical payment periods. For example, what percentage of purchases do you pay in 30 days, 60 days or 90 days? A current aged list of accounts payable will aid in this task.

I Estimate the monthly cash outflow from other operating costs such as wages, benefits, utilities, office expenses, loan payments, rent and advertising, as well as from any sporadic cash outflows such as insurance, income taxes, fixed asset purchases and shareholder/owner drawings. Do not include non-cash items such as depreciation.

I Keep a running total of your cash balance at the end of the month by subtracting net cash outflow or adding net cash inflow to your beginning of the month cash balance. The result will give you an idea of what your cash flow position will look like if you continue to operate in the same manner as in the past.

At this point you should take an objective look at the cash budget and search for areas that can improve your cash position.

For example, the collection of receivables can be improved by implementing stricter criteria for credit acceptance, charging interest on overdue accounts or granting discounts to those who pay early.

Other possibilities include paying creditors at the last possible date, eliminating unnecessary expenditures, increasing expenditures that will result in a greater increase in sales, reducing inventory and buying versus leasing assets.

Once you have determined which areas can be improved upon, your cash budget should be revised. Note, however, that these changes must be realistic and attainable, otherwise the budget will not be useful. Your professional accountant can design a plan that is tailored to your circumstances.

What will an improved cash flow do for your business? It will allow you to order raw materials more efficiently. It will enable you to properly plan upgrading and expansion, and it will permit you to reduce existing debt. The result will be greater financial flexibility to react to future opportunities or to downward trends.

Of course, cash budgeting alone will not make a small business succeed. It is, however, an important starting point and should be a part of every business accounting system.

Cathy Bailey-LeMay is an accountant with the Sudbury office of Peat Marwick Thorne.
COPYRIGHT 1992 Laurentian Business Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:Supplement: Small Business Survival Strategies
Author:Bailey-Lemay, Cathy
Publication:Northern Ontario Business
Date:Apr 1, 1992
Words:641
Previous Article:Examining the alternatives to layoffs.
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