Most folks thinking about starting a business have heard that a third of all new ventures fail inside of two years. The conventional wisdom includes the advice that prospective entrapreneurs have two to three years worth of operational cash on hand prior to taking the plunge. What is not often discussed is the concept of the cash budget; this failure to discuss is a primary mover behind business failures.
The cash budget is different from the common idea of a budget in that cash inflows (revenue) and cash outflows (expenses) are considered in the context of time. The most dangerous budgetary step an owner can take is to consider expenses and sales on the basis of monthly averages derived from annual totals. All sales are not equal; most businesses have a seasonal component to them, and the differences in when cash comes into the till creates artificial shortfalls in a business plan.
The cash budget is a simple process based on the knowledge you have of your business and neighborhood.
- Establish an events calendar that accounts for market drivers in your neighborhood. Weather patterns, little league games, holidays, and industrial work patterns (factory schedules, farming) all have an effect on small business patterns.
- Build weekly sales forecasts based on your events calendar, and make sure that they are conservative numbers and not overly optimistic.
- Understand your receivables; are you a cash now business, or are some of your revenues dependant on longer term credit payoffs?
- Using the previous points, form a credible schedule of monthly inflows (i.e. how much money will actually be in the bank at a given time?)
- Establish a schedule of outflows, first figuring labor based on your business patterns established in the previous points
- Plot your fixed expenses and decide of fixed utilities expenses fit your plan.
- Find opportunities to set aside profits and identify time periods where low interest short term financing is appropriate.
Businesses that don’t plan often rely on non-negotiated high interest loans and credit cards to fill gaps in their monthly budgets. These additional finance charges are rarely forecasted and become that little bit extra that forces a good idea down the drain. Take the time to write a good business plan that is heavy on the details, and your small business dream will have a better chance at long term success!
The Rational Middle is open for comments and questions…