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CPA discusses Small Business Budgeting as a Tool for Cash Flow Management

A Wilmington NC CPA discusses budgeting in small businesses

If you'd like a free initial consult with a CPA in a small business accounting firm, please call (910) 399-2705

At some point, Wilmington NC Widgets, our demo company, became too complex for the owners to optimally manage without the proper tools.  Cash flow management is problematic in any small business, especially in a recession. But Budgeting, which predicts the expected cash coming in, the expected cash flow going out, and the timing thereof, is a good start.

“Creating the first budget may force the owner to think about the business in new ways, revealing un-tapped managerial potential.” 
Gary Bode, CPA
Wilmington NC Small Business Accountant

The CPA for Wilmington NC Widgets uses the past financial parameters and company statistics to make educated estimates for the company’s future cash inflows, cash outflows and when they will occur. The nature of estimates is that they become less reliable the further out in time they’re extended. So, using an Excel spreadsheet generally works because it is so easy to update. Most small business accounting software programs, like Intuit QuickBooks and Peachtree, export reports into Excel for further tweaking.  Income and expenses are categorized, vertically in the rows, on the left, with time frames using the columns horizontally. Excel’s powerful features allow significant automation too.  Calculations, like Financial Ratos, can be graphed over time.

The CPA for Wilmington NC Widgets knows the budget isn’t just an annual task; it needs monthly, or at least quarterly work, to keep it managerially useful. The estimated budget figures also have to be tempered by the owner’s knowledge of the general Widget industry and localized business conditions. For example:

  • Collecting on accounts receivable is slower for the Widget industry in December and January.  So, even though annual cash inflow is readily predictable, simply dividing that figure by 12 doesn’t work. 
  • The price of steel is going up in July which will increase the cost of widgets for WNW in mid September, and begin to affect cash flow on October. So. just using a rolling three month average for predicting widget expense causes a cash flow deficit in October if the price increase isn’t factored in. 
  • A local manufacturer, and major customer of WNW, is partially re-tooling in August.  Over lunch, the owner of WNW concludes widget sales will decrease by $5,000 in July but then increase an additional $1,000 per month starting in August. Under an annual budget, Wilmington NC Widgets “breaks even”; the $5000 lost in July equals the expected increase for the remainder of the year. But a monthly budget, and local business acumen, allows planning for the July shortfall.

Since the budget generally uses a monthly time frame, non monthly figures, like purchase of new equipment, can cause complications in a small business budget.  Sometimes a budget “saves” for an expected future lump sum by creating a monthly amount to be sequestered and eventually pay it. Not a bad idea. But sometimes a pure cash flow budget works best.  

Budgeting is sometimes unsuccessful in small businesses because:

  • The format of the  budget is not structured as cash flow.  Accounting conventions like depreciation are sometimes used, making it clumsy for a non accountant. Handling non monthly payments, like say an annual insurance premium, can also be problematic.
  • Calculations for cash flow estimates are often multi factorial and their inter-dependence is not completely understood by the owner. So the figures are not accurate enough to be useful. 
  • It takes time to learn any new financial tool and the owner may be too busy to do so. 
  • Beginning to run a company by the numbers can be disconcerting to an owner used to running things “off the cuff”.
  • The budget is not continuously refined and becomes obsolete.

The CPA for Wilmington NC Widgets knows it is the owner’s hard work and expertise that make WNW successful in a down economy.  But brilliant business minds have developed financial tools and refined them over centuries. You don’t have to be an accountant to build an accurate budget. But sometimes the wheel doesn’t have to be re-invented, just modified for a particular use. 

We’re a Wilmington NC CPA firm that wants to help you keep more of what you earn.  Budgeting is just one small business accounting service we provide.  For a free initial consult, call Gary Bode, MSA, CPA, PC at (910) 399-2705.

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