When an individual or group of people decide to form a business, there are two things that should be considered, one is that there will always be external factors that cannot be controlled by the business, and two, there are always some factors that can be controlled, and to have control over this there needs to be planning, and to be able to plan we can make use of tools such cash budgeting.
Cash Budgeting helps the business to calculate the cash inflows and outflows over a specific period of time, they are usually prepared on a monthly basis; it helps estimate how much cash goes in and outside the business in order to help managers plan ahead, keep track of the cash and control over the month to month operations.
The cash flow budget will help the business determine when their income its enough to cover the expenses or if the business needs to borrow from outside the company or put in more capital.
For companies that allow costumers pay on credit, this tool is very important because high sales revenue does not necessarily means high cash flows. The manager or business owner should take in consideration how much cash inflows are received. Keep track of the expenses, and calculate if there will be enough cash to meet needs for the month. If there is excess of cash it can be used to pay past loans, invest it and ear some interest, pass it on to savings accounts or use it for future moths were it is expected to have low sales.
Every business is subject to sudden and drastic changes and this tool can allow the business owner to make adjustments and foresee needs and opportunities. It can also be the difference between opening a business and maintaining a business up and running. At the end of the day, there is no business that can survive without cash flow.
The use of this tool is not obligatory, and that’s enough reason for many businesses to not apply it. Here are some of the points why some companies find it useful and others...
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