Article by: Stamford Hill Accountant: Mlondi Shandu
At SME.TAX, we specialize in helping SMEs understand the essentials of budgeting and cash flow management. By breaking down these concepts, we can see how they work together to ensure financial stability.
Monthly Budget
A monthly budget is a projection of your income and expenses for a month. For new businesses, estimating exact figures can be challenging, but it's crucial to start with a turnover estimate and a comprehensive list of potential expenses. This initial exercise forms the foundation of your budget.
As you start trading, replace these estimates with actual figures to see if you have overestimated or underestimated your income and expenses. Ideally, you should underestimate your income and overestimate your expenses to avoid shortfalls.
Cash Flow Forecast
Cash flow reflects the movement of money in and out of your business. It's not just the income from clients but includes all available funds, such as overdrafts, loans, and accounts receivable. Preparing a cash flow forecast helps ensure you have enough funds to meet your financial commitments when they are due. Proper planning ensures you have sufficient funds to cover expected and unexpected expenses.
How Do Budget and Cash Flow Work Together?
Your budget shows your projected turnover, expenses, and profit on a monthly basis. Cash flow, on the other hand, details how you'll manage your expenses with available funds. Regularly reviewing both helps predict when you might need additional funding, providing ample time to secure it.
Example Scenario:
Consider a typical small business scenario where you invoice clients monthly, and 70% pay within 30 days while the remaining 30% take 90 to 120 days. The delayed payments usually account for your profit margin. If new client work continues, this setup is manageable.
Now, imagine a business stoppage due to a global pandemic. You can't secure new clients, and existing clients delay payments further. To manage this situation, you should have:
Conclusion
Understanding and implementing a monthly budget and cash flow forecast are vital for any business's financial health. Regular monitoring and adjustments help navigate unexpected challenges and ensure long-term success.
For personalized assistance with your business budgeting and cash flow management, contact SME.TAX today.
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At SME.TAX we do more than just assist clients with tax planning, we are your “one-stop SME shop”, assisting with everything from Accounting, Business Management, BEE, Consulting, Company Registration to Payroll and Mentoring
For more information, please visit our website www.sme.tax or give us a call on 012 021 0829
