Importance of Financial Planning

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THE CASH BUDGET
 
The need for a cash budget arises because in every business the cash flowing in is rarely "in sync" with the cash flowing out of the business. This uneven flow of cash creates periodic cash surpluses and shortages, making it necessary for small business owners to track the flow of cash through their businesses so they can project realistically the cash available throughout the year. Many managers operate their businesses without knowing the pattern of their cash flows, believing that the process is too complex or time consuming. In reality, entrepreneurs simply cannot afford to disregard the process of cash management. They must ensure that their businesses have on hand an adequate but not excessive supply of cash to meet their operating needs. "The aim of prudent cash-flow management," says one business writer, "is to make sure there'll be enough cash in the till to meet given demand: for that cash at any given time."10 The need for a cash budget arises because in every business the cash flowing in is rarely "in sync" with the cash flowing out of the business. This uneven flow of cash creates periodic cash surpluses and shortages, making it necessary for small business owners to track the flow of cash through their businesses so they can project realistically the cash available throughout the year. Many managers operate their businesses without knowing the pattern of their cash flows, believing that the process is too complex or time consuming. In reality, entrepreneurs simply cannot afford to disregard the process of cash management. They must ensure that their businesses have on hand an adequate but not excessive supply of cash to meet their operating needs. "The aim of prudent cash-flow management," says one business writer, "is to make sure there'll be enough cash in the till to meet given demand: for that cash at any given time."10 One consultant recalls how a cash budget helped salvage a once successful service film that had fallen on hard times. The five-year-old firm with $2u million in annual billing began to lose money and was having trouble paying its hills. After working with the consultant, the company began sending customer invoices much faster and implemented invoices much stricter collection policy. The new collection system involved employees in collecting overdue payments and took immediate action when an account became overdue. Manages set up a receivables report and reviewed it at weekly staff meetings. They also beefed up the company's financial reports, added a cash budget, and used it to make managerial decisions. Within six months, the company's cash balance had improved dramatically (a turn) around of Si-5 million), managers were able to pay down a line of credit at the bank, and the business was back on track again!  

PREPARING A CASH BUDGETTypically, small business owners should prepare a projected monthly cash budget for at least one year into the future and a quarterly estimate several years in advance. It must cover all seasonal sales fluctuations. The more variable a firm's sales pattern, the shorter it planning horizon should be. For example, a firm whose sales fluctuate widely over a relatively short time frame might require a weekly cash budget. The key is to track cash flow overtime. The timing of a company's cash flow is as important as the amounts. "An alert cash flow manager keeps an eye not on cash receipts or on cash demands as average quantities but on cash as a function of the calendar," says one business owner. 11 Regardless of the lime frame selected, a cash budget must be in writing for a small business manager to properly visualize the firm's cash position. Creating a written cash plan is not an excessively time-consuming task and can help the owner avoid unexpected cash shortages, a situation that can cause a business to fail. One financial consultant describes "a client who won't be able to make the payroll this month. His bank agreed to meet the...
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