Budget Your Biz to Success

CASH FLOW Budgeting 2021

By now, you have likely adjusted to the pandemic-caused new normal run rate of your business. Ideally, you would have already completed a 2021 budget that reflects today’s stressed starting point and the recovery path that may result from Covid-stopping vaccines. And, put this plan in motion towards a more profitable new year.

If you were one of the fortunate few small businesses that escaped Covid’s wrath, you still should plan in order to assure you’re building the capital reserves required for the next time business conditions jeopardize your company’s financial health. Government financial assistance like SBA EIDL and PPP loans or the Fed’s Main Street Loan programs may not always be available. What is certain is that domestic political tensions will impact economic winners going forward; as will the enormity of work from home, disruptive innovation, technochasms and digital transformation of the workplace. Keep in mind, too, that the Covid-19 virus has proven more resilient than first thought. So don’t get caught without a fast-reacting plan should that be the case.

Whether impacted by Covid or unscathed, your business needs to be positioned for whatever lies ahead. Budgeting and forward-looking cash flow planning assures you have a roadmap to follow and have alternative strategies in place for when results deviate from expected. As one military leader was once quoted as saying “no plan survives the first contact with the enemy”.

Be comfortable, based on current data, that you can achieve budgeted cash results. Blue sky projections are enticing, but normally unrealistic. Plan on a cash basis. Save your accrual versions for the IRS. The most essential part of budgeting is projecting cash flow and available funding for any temporary cash crunch. And then, living within your means (or cash net income).

Your business must generate consistent cash net income for you to stay solvent and build reserves. Additionally, many companies realize too late that they spend as much or more on investments or financing costs as they generate in cash operating income. So company survival is just as much about what you spend as what you make. Don’t fall into the trap of becoming a “paycheck replacement” firm. Yes, you can write yourself a check that equals monthly profit, but without routinely building reserves, you’ll suffer if any unforeseen shortfall occurs.

Stress testing your revenues, cost of goods sold and SGA expenses on a cash basis is an important early warning tool that establishes the amount of any cash “cushion” that your business may have if the unexpected occurs. You can quickly determine what is required to at least operate on a break even basis. That’s not ideal, but it gives an important reference point for walking around knowledge. What would happen with a six month 10% sales or price decline, or a next quarter 15% increase in costs? Would you still have positive cash flow? This tool, calculated out at least 18 to 24 months on a monthly basis, will identify any cash positions that go negative. The earlier the warning, the more likely a favorable solution can be found. Finding out you’ll run out of cash next week or next month is way too late. This stress tool will identify how long your cash balances and reserves can fund your operating expenses. It is also imperative to have cash contingency or borrowing facilities in place to reestablish a positive cash position.

If you would like more information or assistance in developing a cash flow budget and/or stress test template for your business, please contact us.

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