Cash Flow Budgets
What is a cash flow budget?
A cash flow budget is a prediction of what income and expenses a business will incur during normal operation in a set period of time. This is based on a combination of previous history and trends that usually occur at the same time each year, coupled with any expected events that affect either incoming or outgoing cash flow to your business.
A cash flow budget allows you to estimate the level of available funds that your business has access to at any given time.
Why is it important?
Cash flow budgets are important tools for any business to be able to identify if a venture is likely to be successful. Adjustments can be made on paper, to allow for all scenarios to be played out before taking risks investing in capital expenditure that is likely to end unsuccessfully. By using these forecasts you can make educated decisions on the potential profitability of your enterprise and increase chances of successful business outcomes.
In 2009, the National Consumer Credit Protection Act (Credit Act 2009) was introduced to ensure lenders do not provide unsuitable loans to consumers, which they do not have the capacity to service. Lenders must adhere to The Responsible Lending Obligations which include principles such as making sure that a cash flow budget is taken into account. This provides evidence that the borrower is capable of repaying the debt they are committing to. As such, under current legislation, any significant loan application will require you to submit your own cash flow budget.
How can Xero make it meaningful and current?
You cannot assume to be able to put together a meaningful estimate of future cash flow if you do not have your bookkeeping up to date. It is surprising to see some regular expenses that add up to more than expected when you actually record and analyse the data in real time.
By regularly analysing your bank transactions, you can also pick annual patterns, such as lulls in business income each February for retail businesses, or overdrafts reaching upper limits pre-harvest in September/October for farm businesses.
Xero is a great method of keeping track of your transactions, reconciling them to the correct areas of your business, and being able to study the trends to more accurately predict bank balances in the future.
The Tracking Categories feature in Xero enables reporting on different categories within your business. For example, in a farming operation, different crop types are grown in the same time period. All income and expenses are assigned to their respective categories and the gross margin can be easily calculated for each crop type as the season progresses. There is a great advantage knowing what yield is required to reach your target gross margin, or what price you need to get per tonne for each crop type at harvest.
Many farmers calculate the crop budgets prior to sowing, but only the good operators run the figures pre-harvest to know what the gross margin scenarios may be.
We have industry knowledge
Often people are so busy running their own business that they lodge their tax return well after the 30th June. This information, whilst accurate, is not meaningful to the daily operation of the business as the year progresses. A tax return that reports the financial year from July to June is not always reflective of the profitability of a cropping program that might start incurring costs in March and receives income from harvest sales in January the next year.
At Sensible Solutions, we have the necessary skills and knowledge to be able to use the data captured by Xero to generate a cash flow forecast that is both accurate and meaningful to you and your business. We have the practical industry knowledge to draw from when applying the timing and nature of income and expenses on farm, to real life bank balances and potential overdraft limits.
We have developed templates using crop budgets and living expenses
Using our extensive knowledge of the agriculture industry and the need for running different scenarios we have identified a need for cash flow forecasting templates that can be used over multiple outcomes. These can be run for a range of scenarios such as different crop types; irrigated vs dryland crops; purchasing a new farm; or purchasing plant & machinery vs contracting.
If you are applying for a loan and require a cash flow budget, or you simply want to run cash flow forecast scenarios for your business to make meaningful decisions, contact us to see how we can help you today.
We love working together with Australian agribusinesses and they love working with us.
“I recently approached Andi about helping me set up a new business and crunch some numbers. She was very informative, helpful and understanding, putting together a very professional portfolio for me. I look forward to working with Andi and the team once the business is up and running.”
“Great team, they have been so helpful to our business. Very quick response times, Andi’s background in agriculture has really been a benefit to us and all the girls are so friendly.”