The Economy has changed, people have changed and more importantly banks have changed.  You feel it yourself.  The banks are doing nothing more differently than you are right now.  All of us are holding our cash and not letting it out of our sight.

Do you blame the banks for holding back?  Well, some of you might blame them because the loans they were signing back in the day attributed to the recession.  My view point?  I tend to lean towards the fact that we signed the loans so its the public’s fault.  We need to be smarter with our money and look at every angle when it comes to our money and spending/loaning it. What’s your thoughts?

Past Business Budgeting

I digress.  Let’s look at past budgeting.  How did you budget your expenses and sales in the past?  In a nutshell for me, I analyzed my previous sales year.  Compared it to the economy and get a feel for extenuating circumstances that would have boosted or lowered sales.  Then I looked at the market and economy and try to predict the future :^D  I plan out the next year, predict my sales, budget accordingly the expected expenses and then my bottom line looks great! (easier typed than done)

As the year progresses, you’re turning your financials in to your banker and the bottom line looks great.  You’re pleased and on top of the world.  Even better, your banker is happy too.  You need some extra cash to start a new division? The banker is happy to give it to you.  After all, your bottom line is looking great! However, times have changed and you have to be proactive.

Present day Business Budgeting

Take that same example above.  But throw in the results of a poor economy that is effecting your business.  You’ve cut your expenses to the bare bones and your predicting lower sales.  But in the end your budget is in line. You’re making a small profit and your keeping your head above water.  Feels good doesn’t it?  You’re tackling the problem and staying ahead of the game.  Staying out of the business extinction list is the goal and you have done everything to prevent it.

Now, you want to market, begin a new endeavor, expand and you go to your banker and you need cash to finance this well thought out plan.  You turn in your financials to the banker and he comes back with … what? questions? more reports needed?  Yep, they’ve added another calculation into the lending mix.  Something they are weighing more heavily than ever!  The dreaded cash flow report.  They want to look at your 30, 60, 90 day receivables and are analyzing them hard.  Cash is king and they want to make sure your cash flow is going to maintain the requested loan. Also, their throwing cash flow in the equation for your credit line.  Some banks are even dynamically, each month adjusting your credit line based off your receivables.  Have a lot in the over 90 day category?  It will hurt your credit line with the bank and lower it significantly.

Cash Flow Based Budgeting

So how can you prepare for this.  How do you stay in line with your finances and yet feel like the bank is on your side when helping your business through growth and bad times?  Time to budget off your expected cash flow! Don’t throw your old budgeting ways out the window at all.  But just add a budget off based on cash flow not just sales.

Here are some steps to get you started.

1. Run a cash flow report on previous years
2. Identify the trends in your cash flow from month to month
3. Compare that to your sales for each month and know the difference in percentage. (ex. $100,000 in sales and $70,000 collected = 70%)
4. Analyze each month and average out those percentage

Cash Graph

This is a simple way to look at the numbers.  There are more very in depth ways to getting prepared but this is primarily for beginners out there that have no where to start.

Now you have an idea of what you can expect in cash that comes in compared to your sales.  After making your normal budget for the next year look at each month and now budget your expenses off your cash flow expectations.  It’s a whole new world now isn’t it?  Things look a little differently, maybe a little less bright?

Like I said though, Cash Is King.  Especially to your banker.  Take a little time and start preparing yourself.  Start thinking like your banker and it will help gauge whether or not your banker will lend you money :^D

Another helpful page about Cash Budget