One of the most important kinds of planning is budgeting, the translation of management’s overall strategy into financial terms. Budgeting for small businesses uses the whole management information system because it covers all phases of the small business operation and uses data from all the information subsystems.
The master, budget is a financial model of the entire company, made up of individual budgets for its separate sections. Its foundation is the sales budget since all other operations depend on the accuracy of the sales forecast.
How much is budgeted for production depends on how much is expected to be sold. The same is true for administration and distribution. All these projections are combined to determine how much cash will be needed to run the operation, and as a result, how much income the company will receive.
Table of Contents
Budgeting for small business
But a budget is at best an estimate, and some managers argue that budgeting is too uncertain to be useful. Yet the management of the largest and most successful small businesses would never consider operating without a budget.
Many of them argue enthusiastically that conscientious and continuous budgeting has been a significant factor in their success.
Figure showing the different components of budgeting for small business
The centerpiece of the business plan is the cash budget, which translates operating plans into a financial amount. Without a cash budget, entrepreneurs have no way of estimating their financial needs.
So vital is this budget that few investors or creditors will entertain a request for money without one. More than any other piece of information, the cash budget enables lenders to make an intelligent decision about whether to finance the entrepreneur.
The cash budget, for example, helps the banker obtain answers to three essential questions:
- How much money does the entrepreneur need?
- How will the entrepreneur spend the money?
- How soon will the entrepreneur pay us back?
Cash planning is very important if a company is to meet its payments. Cash planning takes two forms (1) The daily and weekly cash requirements for the normal operation of the business, and (2) the maintenance of the proper balance for all requirements.
Cash Flow of a Small Business
Figure showing the Different Items of Inflow and Outflow of Cash
By referring to the chart above, we see that cash increased by activities such as selling for cash, collecting accounts receivable, receiving a note due to the business, receiving dividends from outside securities, selling of plant assets, and by the owner investing more cash into the business.
Cash is decreased within the operation of a business by the payment of invoices for the purchase of inventory and supplies, by the investment in fixed assets, by paying general operating expenses such as salaries and rent, by the owners’ draw or dividends paid to shareholders and by making payments on bank loans.
The first type of planning tends to be routine. For example, your company may have a fairly constant income and outgo which can be predicted. Policies can thus be established for the level of cash to maintain.
Therefore, a procedure should be established to control the level of cash. These operating demands represent a small part of the cash needs and tend to remain fairly constant.
The second type of pain requires a budget for, say, each month of the year. Payments for rent, payroll, purchases, and services require a regular outflow of cash. Insurance and taxes may require large payments a number of times each year.
Special purchases, say of a truck, will place a heavy demand on cash. It takes pains to have the right amount of cash available at all times.
It shows one form of a cash budget for three months ahead. Each month is completed before the next month is shown. Lines 1-3 are completed for the cash estimated to be received. The Sample Company expects to receive 20 percent of its monthly sales in cash.
A check if its accounts receivable budget (presented in the next section) can provide estimates of the expected cash receipts in January. Other income might come from interest in investments or the sale of surplus equipment.
Expected cash payments, lines 5-12, should include items for which the company pays cash. The Sample Company might list salaries and utilities separately, and combine advertising and selling expenses under sales promotion.
Cash is often paid in the month after the service is performed. Examples of this are payments for electricity and for material purchases.
Some cash payments can be made at any one of several times. For example, payments on a new insurance policy can be set when your other cash demands are low. The cash budget shows when payment is to be made.
The Sample Company Cash Budget Form
(for three months, ending March 31, 2015)
|Expected Cash Receipts : |
Expected Cash Payments:
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