As a small business owner, you’ve probably got your eye set on one or more goals that will lead to expansion or growth for your company. In order to reach those goals—or even keep things running as they are—it’s important to know that you have enough money to sustain your operations or to invest in new and improved products and services down the road. There is no shortage of budgeting structures available to you, but one method that works well for a lot of business owners is cash flow budgeting.

Read on to learn exactly what cash flow budgeting is, how to create this type of business budget, and what the advantages and disadvantages of this budgeting method are.

What is cash flow budgeting?

Cash flow budgeting is a way of determining the cash flow of a business over a period of time to gauge its sustainability. You can also use this method to project future cash flow to plan for long-term financial goals and saving targets.

Rather than looking at your business’s net income or profitability, cash flow budgeting homes in on the movement of money into and out of your accounts by tracking receipts and expenditures associated with your business in a given period. This method makes clear where you may be overspending, as well as where you have a surplus of funds—it’s also a great way to assess your liquidity. Generally, this type of budget is seen as a short-term approach, though it can be used for forecasting spending in the future and working toward long-term financial milestones.

How does cash flow budgeting work?

Before pulling receipts and expenditures, you’ll need to determine what timeframe to use for your budget. This could be weekly, monthly, quarterly, or annually. Choose a duration that makes sense for your business and will accurately reflect spending patterns you may see moving forward. If you recently changed vendors for materials or upgraded your facility, for example, be sure your numbers are reflecting the most current cash flow patterns in your business.

Next, determine your net income during that period. Be sure you’re documenting income from all sources, noting where that income came from and the timing of each payment. Once you’ve got that information, determine the total expenditures for your business—everything you spent money on, from staff wages and manufacturing materials to rent and utilities. As before, make note of where the money went and when exactly you made the payment.

Now comes the moment of truth: subtract the total amount calculated for your expenses in the designated period from your total income. This will determine whether you have a positive or negative cash flow and what your surplus is (if there is any). If you do have a surplus, it means your business is generating more cash than it’s spending, which means you have room to be saving for new endeavors or making improvements in your current business model.

If you’re in a cash flow deficit, on the other hand, it’s time to take a close look at where your money is being spent. For example, learn where to cut costs, scale back in order to get your business into a positive cash flow, or find areas to generate more income.

In order to sustain your new cash flow budgeting system, create a spreadsheet to track all your income and expenses. Once you’ve got this established, it’s relatively easy to maintain. And you’re able to convert the data into a PDF to share information with your team or potential investors! It’s important to keep your colleagues informed on the budget, and investors feel more confident lending you the capital needed to expand or improve your business if they can see you’re consistently in a positive cash flow.

What are the advantages of cash flow budgeting?

There are several reasons cash flow budgeting could be the perfect fit for your business—and also some disadvantages that could send you searching for another option. Here are some considerations to weigh before you commit to this approach:

  • While a number of budgeting styles try to showcase a business’s financial health and help planning for future financial goals, many of them fail to fully show your business’s liquidity at any given moment. By using this budgeting method, however, you can easily see at any time how much cash is available should an emergency come up and demand immediate attention.
  • Because the projected budget is determined based on real numbers rather than by slowly deducting funds from an established line item, as you would in a more traditional budgeting method, this method of budgeting allows you to make more realistic assessments of your current financial standing and future spending.

On the other hand, cash flow budgeting requires consistent attention to ensure your expenses remain up to date. For those looking for a “set it and forget it” method of managing their business’s finances, this may not be a great fit. But while it’s initially time-consuming, the attention required for this method means you’re more likely to quickly get your finances in order.

No matter which method of budgeting you decide is right for you, there’s no time like the present to get serious about your small business budget and managing the cash flow of your business. Cash flow budgeting is a vital part of your financial growth journey and we’re glad to help you progress.