OK, now, you’ve started on your family budget- what about your business budget?  And, does that plan coincide the goals of your business plan?  (Don’t even start by telling me you don’t have a business plan.  If you don’t know where you want to go- how will you get there?  And, how will you know if you did?)

At its foundation, your budget is simply a plan- one the owners (managers?) plan to employ to achieve the business goals for the specific time period.  The cash budget assures that you can maintain and augment the cash position of the firm.  When dealing a business budgets, there are two different types.  Those for established businesses and those that hope to become established J.  The big difference between the two are your ability to project sales revenue (the nascent firm has no track record to use as its basis).

All cash budgets have 3 primary components- the time period, the cash position desired, and estimations for sales and expenses.  Generally, budget terms are annual, three month, or via project-duration.  The cash position is a function of the predictability of sales (and cash realization from same), and the probability for rapid changes in opportunities and/or unfortunate circumstances. And, then we get to the sales prognostication.   Regardless of how you prognosticate sales, it is not a good idea to use a simple percentage of sales to determine costs.

We did that for our medical device firm.  And, we lost valuable opportunities.  As we were starting up- and short of cash (sound familiar), we did closely hone our inventory and raw material purchases to insure that we did not become cash indigent.  But, as we grew and were certain we would last long-term (sometime between the first four months and ten months of operation), we began purchasing our raw materials in larger bulk amounts to obtain discounts.  As such, our raw material cash expenses were no longer 13.2% of sales, but some months were as high as 30% and some months as low as 0.  But, you can only make such judgment calls if you have a business plan, a budget, and compare your results against plan and goals.

You will notice that our budget exhibits a negative cash position at the end of January.  Obviously, that can’t obtain.    (Beginning cash + Collections- Cash expenses= cash position at end of month 1, which carries to the top of the chart as the cash position at the start of month 2). What it means is we either do develop credit for our raw material purchases (i.e., do not pay COD for said deliveries), we borrow money from a bank, or the owners loan the company funds.   You will also notice that we do not get paid upon delivery for our products- and have to rely on our collections for incoming cash flow.

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