What is Cash Budgeting and How to Use it?

Posted: June 26, 2012 by

There are a lot of businesses, small business especially that have a lot of fluctuation in their income from month to month, and learning how to use the revenue peaks and valleys to one’s advantage can be very instrumental in that business’s success. One way to assure that everything “comes out in the wash” is by using cash budgeting along with financial forecasting.

The key concept in cash budgeting is planning ahead by using short term investment options as a way to make the most of a temporary cash flow. A classic example of this may be a retail shop that in the months before the holidays has significantly more revenue than they have during other months of the year. Once the holidays are over, however, they may barely turn a profit at all.

As part of their cash budgeting plan, many businesses will put their extra income from their temporary cash flow in a money market account that will allow them access to however much of their money they need during those times when business may not be so good.

Although retail is an obvious example that most people can relate to in some way, it is important to develop a system for short term financial planning and financial forecasting regardless of what business you might be in. Seasons on the calendar are likely the easiest to track when it comes to financial forecasting, but other things can make an impact too, including how well a local sports team is playing and how close your business is to the stadium. Your city hosting a national convention can also make an impact, either positive or negative, depending on the nature of your business.

It will likely take time, and a bit of trial and error to discover how different scenarios affect your business, but in time you’ll learn to manage your temporary cash flow and you’ll know when it;s time to hold tight and when it’s the right time to grow your business.

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