The cash flow budget is where you estimate the cash you expect to actually receive and the expenses you expect to pay on a monthly basis. Along with being a benchmark for actual performance, the cash flow budget is also an extremely useful cash management tool. I believe that the cash flow budget is the most important and useful budget a small business can use.
The first step in a cash flow budget is estimating the cash you will actually receive from sales (cash inflows) during the year. Multiplying the expected gross sales (from the sales revenue budget) by a discounting percentage (i.e., discounting the expected gross sales by the percentage of sales that will actually be converted into cash during the year) gives you a cash inflow number. If your company has been open for a few years, you can use historical data for the discount percentage. If not, you can use industry averages or make an educated guess.
You then need to convert the annual cash inflows into monthly inflows. If your sales are relatively stable during the year, you can divide the gross estimated cash inflows by twelve months. If your sales are seasonal, you will need to prorate the estimated cash inflows in a manner that is representative of the seasonality of your sales.
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