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 Step one

Start with your sales and estimate the amount of cash you will be able to actually collect and receive in your bank account.

-          Consider adding in any sales of your assets and any bank and other loans and borrowing or any court case settlements.

-          You should be realistic and conservative in your estimates.

-          Make sure to differentiate between cash and credit sales

Monitor pattern of your credit sales.

-          Account as cash in your budget in accordance to your credit terms.

Step two

Estimate your fixed costs which do not change much as your sales or production increases or decreases and can be easily predicted such as: rent, wages of your full time employees, loan repayments, subscriptions, maintenance, superannuation, property taxes, council rates, insurance and professional fees.

Step three

Estimate your variable costs which can vary if your sales increase or decrease such as: materials used for production, wages of your casual employees, purchases of your mayor assets, purchases of tools and equipment, travel, income taxes, superannuation, GST, PAYG withholdings, fuel, gas, electricity, hire of equipment, fines, legal fees, accounting and bookkeeping fees, transport, office supplies, dividends distribution sales and other general costs.

General rule should be to enter expenses when they should be paid and not when incurred so for example if you have purchased materials for $1,000 in June and have to pay for it in August you will make entry in your cash budget in August.

Step four

Consider some flexibility in your estimates by predicting items such as bad debts, sales fall, rise of supplies, interest rates increases, late deliveries or some other unplanned events.

Step five

Enter you opening bank cash balance on the beginning of the month and calculate your closing cash bank balance. Your closing balance in e.g. July will be opening cash balance in August. This will give you better idea about your cash flows. See our cash flow template example.

Step six

Keep notes about your assumptions when creating your budget such as:

-          *Sales predicted I increase by 10% in the following quarter

-          *Costs of materials expected to drop by 5%

-          *Pay rise increase to employees 8% from 1st of April 2012

Step seven

Make your managing decisions in accordance to your budgeted figures. Generally you could invest any short term surpluses or identify the need of short term borrowing if you cash flows are low or you plan purchases of major assets. This is the fundamental reason for having a cash flow budget and as the better information you have in your budget you will be able to make better management decisions.

Useful cash flow tips

-          You should base your prediction on your past performances as well as your future expectations and plans e.g. payments of your materials and stock can be estimated based on your sales and your profit margin.

-          Consult your accountant and ask for opinion once your cash budget is created in order to make sure that there are no errors.

-          Be conservative in your assumptions and try to think out of the square for unpredicted events

-          As setting cash budget is not an easy discipline and requires time, effort, experience and knowledge start with creating budget for only one week ahead instead of trying to do the cash budget for the full year. Eventually when you get better try creating cash budget for one month than, one quarter and finally one year.

Download our example template for cash flow budget

Read our article: Importance of Cash Flows for Small Businesses