Working with cash flows and budgets

No business owner has a crystal ball, but while it’s impossible to predict the future with complete accuracy, budgeting and cash flow forecasting can significantly reduce the guesswork. These tools not only help you anticipate potential challenges but also enable you to make informed decisions that keep your business on track.

By providing a clear picture of your financial health, cash flow forecasts and budgets allow you to plan ahead, manage resources efficiently, and build resilience. Together, they form a powerful foundation for understanding your business’s past, monitoring its present, and shaping its future.

The difference between a budget and cash flow forecast

A budget is your plan for revenue and spending ahead of time. It reflects your business strategy and priorities for a defined period, usually a fiscal year, and helps you set targets, manage departments, and align resources.

A cash flow forecast tracks how money moves into and out of your business in real time. It includes expected income, expenses, and one-time transactions (like loan repayments or tax obligations), showing how much cash you’ll actually have on hand in any given period.

For example, your annual budget may allocate $12,000 for software. But in your cash flow forecast, the actual monthly payments might fluctuate ($987 one month, $1,134 the next) based on licenses, renewals, or usage-based billing.

Keep in mind that:

• Once set, budgets are relatively static and are typically reviewed and adjusted on an annual basis.
• Cash flow forecasts are more dynamic and are updated regularly e.g., weekly, monthly, to reflect actual cash flow movements and changing conditions.

The benefits

A budget and cash flow forecast can help you:

• Schedule capital investments like new hires, tech upgrades, or expansion based on actual available funds.
• Time bulk inventory purchases to align with seasonal demand and working capital availability.
• Support financing decisions when you’ll need a line of credit or term loan months in advance.
• Predict and deal with upcoming cash surpluses or shortages and avoid late payroll or missed supplier payments.
• Control expenses by setting spending limits for different categories. It makes sure that resources are allocated efficiently and reduces the risk of overspending.
• Plan tax obligations.
• Improve accountability by setting performance targets for departments, teams, and individuals, and monitoring their progress.
• Identify if there is cash to pay off debt.

One of the most useful functions is tracking expenses to highlight any costs that have increased or decreased abnormally, allowing you to take timely action. The other function is to check sales levels and signal any red flags if some area of your business is underperforming.

Budgeting tips

Allow at least two or three months to prepare for your annual budget and prepare 12-month forecasts on an on-going basis. Update your budget each month based on what happened in your cash flow.

Often the hardest piece to get right is the sales forecast, which typically is based on a combination of your sales history, current market conditions and your marketing campaigns. But if you’ve never been in business before, you’ll need to look at separate forecasts for different products or geographical areas and any seasonal patterns of your business and industry.

Remember that sales variations may reflect any changes to price, what competitors are doing, the launch of new products or shifting economic conditions.

There are some common reasons you might not get your forecast right, especially in the beginning. These include:

• Overly optimistic sales projections that lead to inflated revenue expectations. This can happen due to assuming rapid market growth or overestimating the impact of marketing efforts.
• Lower prices, or a different sales mix.
• Not tracking recurring costs like subscriptions, utilities, or insurance premiums can lead to underestimating expenses.
• Overlooking external factors such as regulatory changes, technological advancements, or geopolitical events can affect budget accuracy.
• A location is underperforming.
• Not gathering insights from suppliers or customers regarding potential changes in costs or demand.
• A previous increase in sales was one-off and not the start of a trend.
• Marketing took longer to have an effect than anticipated.
• Customers were slower to pay than you expected.

Forecasting when you will be paid for sales will also be affected by the credit terms your offer, the effectiveness of your debt collection and whether people pay on time. Be sure to include items that don’t relate to sales or operating expenses in your cash flow forecast such as loan repayments, tax and shareholder dividends or drawings.

Sensitivity analysis

These are what-if scenarios that can show you how different outcomes affect performance. Typically, you might work with optimistic, pessimistic and most-likely scenarios to analyze the effects of any changes to revenue or costs. You can also check the impact of any other significant risks to your business. For example, if thirty percent of your turnover comes from one customer, consider what would happen if they stopped buying from you.

Actual expenditure

Comparing this against your budget helps you improve your ability to predict future costs accurately. Some fixed costs may increase as the business grows, while variable costs per unit may even be lower.

Reasons for changes in the relationship between costs and turnover could be:

• The efficiency of production.
• Volume discounts.
• Costs brought forward or delayed.
• Changing supplier payment terms or payment policies.

Each month look at your budget and compare it to your actual cash flow and then amend it as you go.  Each month as more business information comes in, you will get more and more accurate at completing these forecasts.

Next steps

• Select the right software and invest in a platform with forecasting and multi-scenario tools.
• Schedule monthly reviews with your team to compare forecasts vs actuals and recalibrate.
• Model for uncertainty and build scenarios that reflect industry, economic, and client-specific risks.
• Set aside reserves to build a 2–3 month operating buffer and fund your tax or debt obligations.

Mastering budgets and cash flow forecasts is essential for small businesses,  as they provide the clarity and control needed to navigate challenges, seize opportunities, and drive sustainable growth.

BUSINESS LENDING »   BUSINESS BANKING SERVICES »