How to build a cash flow budget

The cash flow budget stands out as an indispensable tool for steering your business. It gives you a snapshot of the funds you have available at any given moment. This way, you know how much money you have to pay your invoices and plan for potential investments. Building a cash flow budget doesn’t happen by chance. In this article, we offer a guide to building and managing it easily, so you can gain more clarity on your company’s strategy.

What is cash flow?

First, let’s remember that a company’s cash position is an accounting concept used to measure its available financial resources — that is, the amount of money immediately accessible in the bank at a given time.

What is a cash flow budget?

The cash flow budget takes the form of a table that summarizes, month by month, the company’s projected cash inflows and outflows over a defined period. It is most often drawn up over 12 months, but nothing obliges you to do so. You can adjust the period to fit your company’s life and the particular phases it is going through, whether positive or negative.

The cash flow budget is made up of three parts:

• Cash inflows, corresponding to all incoming money;
• Cash outflows, which summarize all outgoing money;
• Cash balances at the beginning and end of the month.

How do you tell your cash flow budget apart from your forecast budget?

There are three major differences between your cash flow budget and your forecast budget:

• The cash flow budget accounts for payment terms, whereas the forecast budget does not;
• The income statement is expressed excluding VAT, while the cash flow budget is expressed including VAT;
• The income statement does not take VAT payments into account.

As a result, the forecast budget sets your annual targets, and the cash flow budget confirms that you have the funds to finance them.

What tools should you use to build your cash flow budget?

The simplest tool for building your cash flow budget is an Excel spreadsheet. However, it’s best to use your accounting software, which should let you run configurable exports. This saves you considerable time and protects you from data entry errors as well as omissions.

How do you draw up your company’s cash flow budget?

Forecast your cash inflows

Your first task is to forecast all of your company’s expected revenue. You can base this on your income statement or use the tools provided by your invoicing software.

The inflow budget accounts for the gap between when an invoice is issued and when it is actually paid. You must also specify the applicable VAT rate and enter, in your table, the amount including VAT at the actual date of collection.

The main cash inflows consist of:

• sales to customers;
• VAT credit refunds, URSSAF hiring bonuses, etc.;
• financing: personal contribution, bank loan, grants, fundraising, etc.

Forecast your cash outflows

Against the incoming money represented by inflows, you then set the outgoing money that makes up outflows. You need to list all of your expenses, categorized, whether one-off or recurring. Once again, rely on your income statement to make sure you don’t miss anything.

Here too, take into account the payment terms you’ve negotiated with your service providers and suppliers. Factor in VAT so that amounts are entered including VAT. You must also anticipate in your budget the VAT amounts to be paid out.

Fixed costs

Recurring outflows consist of the following items:

• rent;
• premises maintenance;
• water, electricity and gas bills;
• taxes and duties;
• insurance;
• software, internet, phone subscriptions, etc.;
• accountant’s fees;
• loan repayments;
• bank fees;
• net salaries;
• social security and employer contributions;
• provident scheme, health insurance and retirement contributions;
• marketing and advertising expenses;
• meal vouchers, etc.

Fixed costs are the easiest to manage because, by definition, they can be forecast with great accuracy.

One-off or more irregular expenses

Next, add one-off expenses, depending on your business activity:

• supplier invoices for raw material purchases;
• vendor invoices for subcontracting;
• lawyer or consultant fees, etc.;
• travel expenses;
• expense reports;
• office supplies, etc.

How do you manage payment terms?

It’s important to configure your accounting software to correctly manage payment terms, taking VAT and its various rates into account. This is known as the VAT chargeable event: it refers to the moment when the legal conditions for VAT to become due are met. This way, you provision for collected or deductible VAT in your cash flow budget.

For your customers, suppliers and service providers, you need to categorize them according to payment or settlement terms, so you can allocate them correctly in your cash flow budget. Also take installment schedules into account, since some invoices are split and paid or due in several installments — for example, 30% on order and the balance on delivery.

Accounting for VAT in your cash flow budget

If you’re a sole trader (auto-entrepreneur) and your revenue is below the VAT exemption threshold, you’re fortunate enough to avoid the VAT headache. In all other cases, it’s essential to include the VAT movements that affect your cash flow budget.

How does VAT collection work?

If you’re not yet familiar with VAT, here are its basic principles:

• When a customer pays your invoice, you receive the amount including VAT, made up of the amount excluding VAT that belongs to you and the VAT you collect on behalf of the State;
• When you pay an invoice from a supplier or another service provider, you find yourself in the customer’s role: you pay an amount including VAT, made up of the amount excluding VAT plus the VAT, which is then considered deductible;
• The VAT balance over a year — positive or negative — equals the VAT collected minus the deductible VAT.

If your VAT balance is positive, you must repay the State and make a payment that must be recorded in your cash flow budget. Since this amount can be significant, you need to calculate it as precisely as possible, taking into account the different VAT rates as well as the VAT chargeable event. Finally, you set up the entry of VAT movements according to your company’s filing regime, which can be annual, half-yearly, quarterly or monthly.

Calculating the cash balance

Once you’ve included the inflows and outflows in your cash flow budget, you’re able to determine your cash balance at the end of the month. To find it, take your cash balance at the beginning of the month, add the inflows, and subtract the outflows.

The cash balance is a critical element for assessing your company’s financial health. If it’s positive, you can continue your investments and pay off your debts; if it’s negative, you must revise your strategy as quickly as possible, because you won’t be able to cover your debts (expenses, salaries, invoices, taxes, etc.) or make the investments needed to reach your goals.

Take the time to truly build your cash flow budget, because it is crucial for your company’s future. Make the most of your accounting software, which should offer you relevant tools to configure your table and give you the most accurate results possible.