Budgets and cash buffer

The budget is the plan for your business and a great tool to make sure the business is on track. A good budget shows how changed conditions affect your business and is a good help when deciding on what actions to take. There are different types of budgets and different scenarios to use. 

Make an operating budget 

The operating budget is the financial plan for your business. Stress test the budget by making three versions based on three different scenarios: best case, worst case and one in the middle of the two. That makes it possible to evaluate how well the budget holds against challenges. This also provides a back-up plan and helps you to make the right business decisions if things do not go as expected.

Make a cash flow budget

It is important to also create a cash flow budget. Cash flow problems are a more common reason for new businesses to fail than problems with profitability.

A cash flow budget should include:

  • Sales forecast going forward as long as possible.
  • Forecast of the cash you anticipate flowing into your business. 
  • Forecast of the cash you anticipate flowing out of your business.
  • Overview of all three forecasts put together to show your cash flow bottom line.

Get more out of your budgets 

Use the budgets in day-to-day work to be on top of the finances and spot changing trends or new risks in time. This can be the difference between success and failure. Many successful businesses check their budgets monthly or even weekly. Find a good routine that suits you, and rather check more often than needed than the other way around.

How large should your cash buffer be?

Having a cash buffer will provide your business with a soft pillow to land on if you run into tough financial times. Just make sure to keep a balance between the security of a cash buffer and using the money to make good investments for your business. Finding the right size of the cash buffer is important to make sure you use the money in the best way possible.

How to find the right buffer amount

How much cash a business need as a buffer differs a lot between companies. Here are some things to look at in order to calculate the needed cash buffer:

1. Previous cash net spending

Spending in previous years is a good indicator for future cash needs. The net spending is the cash spent minus the cash received from sales.

2. Spending plans and unexpected expenses

Consider any planned extraordinary spending and make sure to have cash for unexpected expenses, such as equipment breaking down or losing a large customer.

3. How long time it takes to get cash

The cash buffer should be large enough to cover expenses during the time it takes for the business to get cash.  If your business is dependent on finding investors or applying for loans in order to get cash you need a large buffer. 

4. Stage in the business cycle

Look at your business today and estimate how that might change in the near future. Do the changes bring needs for investments, new facilities or more/less staff?

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